Beruflich Dokumente
Kultur Dokumente
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Pricing and Business
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Major Influences on Pricing Decisions
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Differences Affecting Pricing:
Long Run vs. Short Run
1. Costs that are often irrelevant for short-run
policy decisions, such as fixed costs that
cannot be changed, are generally relevant in
the long run because costs can be altered in
the long run
2. Profit margins in long-run pricing decisions are
often set to earn a reasonable return on
investment
In short run: prices are decreased when
demand is weak and increased when demand
is strong
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Costing and Pricing for the Short Run
Example:
Astels Computers manufactures two brands of PCs
Deskpoint (Astels top-of-the-line product), and Provalue (a
less-powerful machine)
Datatech Corporation has asked Astel to bid on supplying
5,000 Provalue computers over the next three months.
Datatech will sell Provalue computers under its own brand
name and in regions and markets where Astel does not sell
Existing sales for Astel will not be affected.
Astel needs additional capacity for this 5,000 PCs.
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Costing and Pricing for the Short Run
(contd.)
Example (contd.):
Before Astel can bid on Datatechs offer. Astels
managers must first estimate how much it will cost to
supply the 5,000 computers.
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Costing and Pricing for the Short Run (contd.)
Example (contd.):
The relevant cost per unit is $574. therefore, any selling
price above $574 will improve Astels profitability in the short
run.
Astels managers also know that one of its competitors with
idle capacity will bid between ($596 and $610)
Management's strategy is to bid as high above $574 as
possible while remaining lower than competitors bid.
Astels managers must also consider other effects of its
pricing decision, such as wether Datatech will undercut
Astels selling price in Astels current markets. If Astels
managers believe this is a significant risk, the cost should
include the contribution margin lost on sales to existing
customers.
Astels managers decide to make a bid at a price of $595.
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Costing and Pricing for the Short Run
(contd.)
Companies may experience strong demand for
their products in the short run, but they may have
limited capacity.
In these cases, companies strategically increase
prices in the short run to as much as the market
will bear.
We observe high short-run prices in the case of
new products or new models of older products,
such as microprocessors, computer chips, cellular
phones, and software.
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Costing and Pricing for long Run
A stable price:
Reduce the need for continuous monitoring of suppliers
prices.
Improves planning
Build long-run buyer-seller relationships.
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Alternative Long-Run Pricing Approaches
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Markets and Pricing
Competitive Markets (steel, oil, natural gas) use the
market-based approach
Less-Competitive Markets (automobiles, computers,
consulting services) can use either the market-based or
cost-based approach
Noncompetitive Markets use cost-based approaches
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Five Steps in Developing
Target Prices and Target Costs (contd.)
3. Derive a target cost per unit:
Target Price per unit minus Target Operating Income
per unit
Astels management needs 10% target operating
income on target revenues.
Total target OI = 10% ($800 /unit X 200,000 unit)=
$16,000,000
Target OI per unit = $16,000,000 200,000 = $80/unit
Target cost per unit = target price target OI/unit
Target cost per unit = $800 - $80 =$720
Current cost per unit of Provalue = $900
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Five Steps in Developing
Target Prices and Target Costs (contd.)
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Cost-Based (Cost-Plus) Pricing