CHAPTER 12
PRICING DECISIONS AND COST MANAGEMENT
12-1 The three major influences on pricing decisions are
1. Customers
2. Competitors
3. Costs
12-2 Not necessarily. For a one-time-only special order, the relevant costs are
only those costs that will change as a result of accepting the order. In this case,
full product costs will rarely be relevant. It is more likely that full product
costs will be relevant costs for long-run pricing decisions.
12-3 Two examples of pricing decisions with a short-run focus:
1. Pricing for a one-time-only special order
with no long-term implications.
2. Adjusting product mix and volume in a
competitive market.
12-4 Activity-based costing helps managers in pricing decisions in two ways.
1. It gives managers more accurate product-cost information for making
pricing decisions.
2. It helps managers to manage costs during value engineering by identifying
the cost impact of eliminating, reducing, or changing various activities.
12-5 Two alternative starting points for long-run pricing decisions are
1. Market-based pricing, an important form of which is target pricing. The
market-based approach asks, “Given what our customers want and how our
competitors will react to what we do, what price should we charge?”
2. Cost-based pricing which asks, “What does it cost us to make this product
and, hence, what price should we charge that will recoup our costs and achieve
a target return on investment?”
12-6 A target cost per unit is the estimated long-run cost per unit of a product
(or service) that, when sold at the target price, enables the company to achieve
the targeted operating income per unit.
12-7 Value engineering is a systematic evaluation of all aspects of the value-
chain business functions, with the objective of reducing costs while satisfying
customer needs. Value engineering via improvement in product and process
designs is a principal technique that companies use to achieve target costs per
unit.
12-8 A value-added cost is a cost that customers perceive as adding value, or
utility, to a product or service. Examples are costs of materials, direct labor,
tools, and machinery. A nonvalue-added cost is a cost that customers do not
perceive as adding value, or utility, to a product or service. Examples of
nonvalue-added costs are costs of rework, scrap, expediting, and breakdown
maintenance.
12-9 No. It is important to distinguish between when costs are locked in and
when costs are incurred, because it is difficult to alter or reduce costs that have
already been locked in.
12-10 Cost-plus pricing is a pricing approach in which managers add a
markup to cost in order to determine price.
12-11 Cost-plus pricing methods vary depending on the bases used to calculate
prices. Examples are (a) variable manufacturing costs; (b) manufacturing
function costs; (c) variable product costs; and (d) full product costs.
12-12 Two examples where the difference in the costs of two products or
services is much smaller than the differences in their prices follow:
1. The difference in prices charged for a telephone call, hotel room, or car
rental during busy versus slack periods is often much greater than the
difference in costs to provide these services.
2. The difference in costs for an airplane seat sold to a passenger traveling on
business or a passenger traveling for pleasure is roughly the same. However,
airline companies price discriminate. They routinely charge business
travelers––those who are likely to start and complete their travel during the
same week excluding the weekend––a much higher price than pleasure
travelers who generally stay at their destinations over at least one weekend.
12-13 Life-cycle budgeting is an estimate of the revenues and costs
attributable to each product from its initial R&D to its final customer servicing
and support.
12-14 Three benefits of using a product life-cycle reporting format are:
1. The full set of revenues and costs associated with each product becomes
more visible.
2. Differences among products in the percentage of total costs committed at
early stages in the life cycle are highlighted.
3. Interrelationships among business function cost categories are
highlighted.
12-15 Predatory pricing occurs when a business deliberately prices below its
costs in an effort to drive competitors out of the market and restrict supply,
and then raises prices rather than enlarge demand. Under U.S. laws, dumping
occurs when a non-U.S. company sells a product in the United States at a price
below the market value in the country where it is produced, and this lower
price materially injures or threatens to materially injure an industry in the
United States. Collusive pricing occurs when companies in an industry
conspire in their pricing and production decisions to achieve a price above the
competitive price and so restrain trade.
