Scribd
Upload
36 views

Pricing

The document discusses various objectives, methods, and concepts related to pricing. It outlines objectives like maximizing profit and market share. Pricing methods discussed include full cost-plus pricing, marginal cost-plus pricing, and differential cost-plus pricing. Full cost-plus pricing sets price by adding a markup percentage to average total costs. Marginal cost-plus pricing uses variable costs as the basis while differential cost-plus pricing considers both fixed and variable costs. The document also discusses return on investment pricing, transfer pricing, and different transfer pricing methods like total cost concept and product cost pricing.

Uploaded by

souumya
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
36 views

Pricing

The document discusses various objectives, methods, and concepts related to pricing. It outlines objectives like maximizing profit and market share. Pricing methods discussed include full cost-plus pricing, marginal cost-plus pricing, and differential cost-plus pricing. Full cost-plus pricing sets price by adding a markup percentage to average total costs. Marginal cost-plus pricing uses variable costs as the basis while differential cost-plus pricing considers both fixed and variable costs. The document also discusses return on investment pricing, transfer pricing, and different transfer pricing methods like total cost concept and product cost pricing.

Uploaded by

souumya
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 25

OBJECTIVES

Maximize long / short run profit Increase domestic & over-sea sales Increase market share Company growth Maintain price leadership

OBJECTIVES

Discourage new entrants Match competitors price Survival Enhance the image of firm, brand, product Social, ethical, ideological objectives Get competitive advantage

METHODS OF PRICING

1. 2. 3.

Full Cost - Plus Pricing Marginal Cost - Plus Pricing Differential Cost - Plus Pricing

FULL-COST PRICING

Cost-plus pricing means the addition of a certain percentage of the costs as profits to the cost of production to arrive at the price. This is known as mark-up This method suggests that price of a product should cover its full cost and generate the returns at a fixed mark-up percentage. Price=average direct costs + average overhead costs+ a normal margin for profit

FULL-COST PRICING
Cost

is an important factor for determining price There are three methods of computing cost I. Actual cost II. Expected cost III.The standard method of costing Cost-plus pricing can be classified into two categories on the basis of mark-up I. Rigid cost-plus price II. Flexible cost-plus pricing

Price products using the cost-plus approach.

Cost-Plus Pricing

The general formula for setting a cost-based price is to add a markup component to the cost base.

Cost base Markup component Prospective selling price

$ $

X Y X+Y

Cost-Plus Pricing

Assume that Latishas engineers have redesigned a product at a new cost of $637.50.

The company desires a 20% markup on the full unit cost. What is the prospective selling price?

Cost-Plus Pricing

Cost base: Markup component: (637.50 .20) Prospective selling price: The 20% markup expresses operating income per unit as a percentage of the full product cost per unit.

$637.50 127.50 $765.00

Advantages of Using Full Costs


Full recovery of all costs of the product Price stability Simplicity

Disadvantages

Ignores the demand of the product Opportunity cost is not considered Adherence to rigid price Profit margin or costing margin is vague

MARGINAL COST - PLUS PRICING


Variable cost as a basis for pricing Helps a business to enter into new market Recovery of fixed costs may be doubted

DIFFERENTIAL COST - PLUS PRICING


Adding a mark-up on differential cost Considers fixed cost as well as variable cost Contributes towards recovery of fixed cost

RETURN ON INVESTMENT PRICING


Also known as Target-Return Pricing The "return on investment" pricing method determines the price of a product based on the target return on the amount invested in a product OR what is the profit percentage a producer expects based on the investment.

HOW TO CALCULATE?
ROI PRICING=UNIT COST+ DESIRED RETURN*INVESTED CAPITAL UNIT SALES EXAMPLE: UNIT COST = 16/DESIRED RETURN = 20% INVESTED CAPITAL = 10,000/EXPECTED UNIT SALES = 500 UNITS

ADVANTAGES

Consistent with other performance measures - e.g. Return on Investment A suitable method for market leaders which are able to set a price which competitors follow A relevant pricing method for new products particularly those which have a substantial investment.

DISADVANTAGES

With new products, there is an inherent uncertainty Some investment may be common to several products or product groups .This raises the question of how to apportion investment amongst products.

TRANSFER PRICING

The price charged for transfer of goods and services from one division to another within the same firm is known as the transfer price The pricing can be market based or nonmarket based

OBJECTIVES

Reduce taxes. Reduce tariffs Avoid exchange controls. Optimize global profits by reducing taxes and tariffs to the minimum or nil levels Motivating managers

TYPES OF TRANSFER PRICING

Total Cost Concept or Profit Margin Pricing Product Cost or Gross Margin Method Return on asset pricing

TOTAL COST CONCEPT


Particulars Variable manufacturing expense Variable S & D expenses Fixed factory overheads Fixed S & D expenses Cost 5 per unit 2 per unit 80000 30000

Total cost = Fixed cost + Variable cost = 80000 + 30000 + [(5*10000) + (2*10000)] = Rs 1,80,000

Given : Desired profit = Rs 27,000

Markup Percentage =Desired Profit / Total Costs = 27000 / 180000 Selling Price = Cost + markup

Product cost pricing


Markup Percentage =
Desired Profit + Total Selling & Administrative Expenses Total Manufacturing Costs = 27000 + [ (2*10000) + 30000)] (5*10000) +80000 =59.2%

Return on asset pricing

ROA based price =

Total Costs and Expenses per unit + [Desired Rate of Return x


(Total Costs of Assets Employed / Anticipated units to be produced)]

You might also like