Solution
David answered on
Dec 21 2021
REPORT
Topic no. 1
The models and concepts affecting the pricing decisions taken by organizations, critically reflecting upon their usefulness
Comment:
Critical evaluation of the models and concepts affecting the pricing decisions taken by organizations, along with their usefulness:
Pricing decision methods can be
oadly categorized into two parts:
A) External factor based
B) Cost/Return Based
External factors based:
1) Market leadership: In this methodology, the firm is either market leader or want to become market leader. Therefore, it sets the price of product in such a way that other firms’ share in the market gets reduced. By following this methodology, a firm may bear some losses or generate little margins, to drive out other players. Usually, the price are set at very low level.
2) Competitive pricing: If the market is pure competitive, a firm can be just follower of market price and don’t have much space to do something with pricing. In such situation, the firm can maintain or increase its market share by delivering quality products/services to the customers. Once the
and recognition established well with customer, the company can go for premium price policy.
3) Differential pricing: A firm can price different amount for different classes of customers or for different geographies, based the analysis of behavior pattern of the target customer or area. The firm can make good margin in areas where it is the market leader by keeping prices high, while it can follow the market price or price lower where the market is much competitive or the firm is trying to capture the new market share. The aim of firm is to maximize the overall profits from sale across geographies or across product lines.
Cost/Return based:
A) Return on investment: The firm can fix a target return on investment and then add this target return on the cost incu
ed or amount invested on the product/service to get the final pricing. This method is useful, when the firm has unique product and no other competitor can affect the pricing decision methodology of firm. However, this methodology ignore market forces and hence not used widely.
B) Mark-up pricing: The price of product/service is determined by adding fixed amount or fixed percent (known as mark-up) over its cost. By adhering to this methodology, a firm can maintain a certain level of returns. There may be some escalation clauses in the pricing agreement which tends to protect the interest of firm in case of cost rise. This method also ignore market forces which affect price of its products/services and hence not much prevalent.
Usually, external and internal factors both are considered simultaneously in pricing decision. The supply and demand of product plays important role in pricing. Given the higher demand than supply, firm can keep high prices and make good margins. Some firms use ‘Multi-regression’ model of pricing. In Multi-regression’ method, firm selects many factors that affect the price of product/service and then build an regression model incorporating all these factors to a
ive at product /service price. Although it is more inclusive method of pricing, but it is difficult to implement at all points of time.
Some of the examples of various modes in which the products are priced are –
Mark up pricing
Particulars
Amount
Cost of material
500
Cost of labo
1,000
Other overhead
2,000
Total cost
3,500
Margin on cost 20%
700
Selling price
4,200
Return on investment pricing
Particulars
Amount
Cost of material
500
Cost of labo
1,000
Other overhead
2,000
Total cost
3,500
Other capital investment
10,000
Total return required
1,350
Selling price:
Total cost
3,500
Margin required
1,350
Selling price
4,850
Observation:
In the above given two example, the pricing came different under two different method. But, both methods are not flawless. What we can say based on the above explanation is that pricing of the product does not only depend upon the cost involved and the return which the firm desires, but also depends upon various other factors. There can be the reason that the price of the product is not properly designed to generate profit but considering the nature of the product i.e. electrical goods it is quite evident that the price has to be determined based on what the competitors are charging since there are large number of sellers who sell similar products. Thus even though the cost is higher and the price cannot be raised to more than what the market is charging. If the firm is market leader in electronic good segment, it can reduce the price to garner more customer share. This will drive out the other players from the market. So, even after reduction in price, volume will increase sufficient to increase the overall profitability of Manac Plc.
It is to be noted here that in order to generate the desired level of profit in this situation the firm need to increase the volume of sales.
References:
1. Approximately Right, Not Precisely Wrong: Cost Accounting, Pricing, & Decision Making by Yoram Eden and Boaz Ronen (Dec 1, 2007)
2. Pricing Strategy: Setting Price Levels, Managing Price Discounts and Establishing Price Structures by Tim J. Smith (Jan 18, 2011)
3. The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making (3rd Edition) by Thomas Nagle and Reed Holden (Nov 10, 2001)
4. International Transfer Pricing Policies: Decision-Making Guidelines for Multinational Companies by Wagdy M. Abdallah (Mar 13, 1989)
Topic no. 2
The role of standard costing and variance analysis in management accounting and a critically discussion of the value and limitations of variance analysis as a means of identifying key areas which have contributed to the overall profit figure
Comment:
Manac plc, uses standard costing and absorption costing as part of its approach to strategic management accounting. We need to understand its terms properly. The standard costing is a mechanism to make budget of all items based on standards and do the accounting based on these figure. Further, the actual results are compared with standards in order to figure out the differences, which are known as variances and reasons...