Kế toán, kiểm toán - Chapter 8: Pricing decisions, customer profitability analysis, and activity - Based pricing

CHAPTER 8Pricing Decisions, Customer Profitability Analysis, and Activity-Based PricingSlide 8-2Pricing DecisionsPricing decisions are often the most difficult decisions that managers facePricing decisions examined in this chapter includeProfit-maximizing price from the standpoint of economic theoryPricing of special ordersMarking up costs and target costingMeasuring customer profitability and activity based pricingSlide 8-3The Profit-Maximizing PriceEconomic theory suggests that the quantity demanded is a function of the price that is chargedGenerally, the higher the price, the lower the quantity demandedIf managers can estimate the quantity demanded at various prices, determining the optimal price is straightforwardSlide 8-4Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order.The Profit-Maximizing PriceTo calculate the profit-maximizing price:Subtract unit variable costs from price to obtain the contribution marginMultiply the contribution margin by the quantity demandedSubtract fixed costs and estimate profitsSelect the price with the highest profitSlide 8-5Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order.Estimating the Profit-Maximizing PriceSlide 8-6Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order.Estimating DemandThe most difficult part of determining the profit-maximizing price is determining the demand functionA number of approaches can be usedSales managers in various regions could estimate the total quantity demanded at various pricesThe product could be test marketed with a number of potential customers at various pricesSlide 8-7Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order.Estimates of price and quantity demandedPrice = $6.95, quantity demanded = 20,000Price = $5.95, quantity demanded = 25,000Price = $4.95, quantity demanded = 32,000Variable cost = $1.50 per unitFixed cost = $80,000 Find the profit-maximizing priceSlide 8-8Test Your Knowledge 1Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order.Pricing Special OrdersSpecial orders are for goods and services not considered part of a company’s normal businessPrice charged will not affect prices charged in the normal course of businessThe company may be better off charging a price that is below full costSlide 8-9Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order.Pricing Special OrdersThe special order decision presents two alternativesAcceptRejectIncome from the main business is the same under both alternativesIt is not incremental and need not be considered in the special orderSlide 8-10Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order.Pricing Special OrdersNeed to consider incremental revenues and incremental costsThe incremental revenue is the revenue associated with the special orderIncremental costs can includeDirect materialsDirect laborVariable overheadIncremental fixed costsSlide 8-11Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order.Special Orders – Premier Lens Example Should Premier Lens accept special order of 20,000 lenses to be sold to Blix Camera for $73 per lens? Below is the full cost of $75 per lensSlide 8-12Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order.Special Orders – Premier Lens ExamplePerform incremental analysisFixed costs are not incremental, they will not change if the order is acceptedSlide 8-13Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order.Importance of Pricing PowerSlide 8-14Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order.Which of the following is true?In pricing special orders, fixed costs typically are not relevantIn pricing special orders, fixed costs typically are relevantAnswer: aFixed costs typically are not relevantSlide 8-15Test Your Knowledge 2Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order.Cost-Plus PricingWith a cost plus approach, the company starts with an estimate of product costTypically excluding any selling or administrative costsAdds a markup to arrive at a price that allows for a reasonable level of profit Slide 8-16Learning objective 2: Explain the cost-plus approach to pricing and why it is inherently circular for manufacturing firms. Also, explain the target costing process for a new product.Cost-Plus PricingAdvantagesThe cost plus approach is simple to applyThe company will earn a reasonable profit if a sufficient quantity can be sold at the specified priceThe approach also has limitationsSlide 8-17Learning objective 2: Explain the cost-plus approach to pricing and why it is inherently circular for manufacturing firms. Also, explain the target costing process for a new product.Cost-Plus PricingLimitationsDetermination of an appropriate markup requires considerable judgmentExperimentation with different markups may be necessaryInherently circular for manufacturing firmsNeed to estimate demand to determine fixed costs and the price, yet the price affects the quantity demandedSlide 8-18Learning objective 2: Explain the cost-plus approach to pricing and why it is inherently circular for manufacturing firms. Also, explain the target costing process for a new product.Cost-Plus PricingSlide 8-19Learning objective 2: Explain the cost-plus approach to pricing and why it is inherently circular for manufacturing firms. Also, explain the target costing process for a new product.All of the following are limitations of cost plus pricing exceptDetermination of the markup percentage requires judgmentIs inherently circular for manufacturing firmsExperimentation may be necessaryCost plus is simple to applyAnswer: dSimplicity is an advantage of cost plus pricingSlide 8-20Test Your Knowledge 3Learning objective 2: Explain the cost-plus approach to pricing and why it is inherently circular for manufacturing firms. Also, explain the target costing process for a new product.Target Costing Slide 8-21Once a product is designed it is difficult to make changes that reduce costs80% of a product’s costs cannot be reduced once it is designedProduct features drive costsTarget costingIntegrated approach to determine features, price, costs and design to ensure a profitLearning objective 2: Explain the cost-plus approach to pricing and why it is inherently circular for manufacturing firms. Also, explain the target costing process for a new product.Target Costing Slide 8-22The process begins with an analysis of competing productsThis leads to a specification of features and price attractive to customersThe second step is to specify a desired level of profitThen the engineering department with input from the cost accounting department develops a design that can be produced at a cost which will earn the desired level of profitLearning objective 2: Explain the cost-plus approach to pricing and why it is inherently circular for manufacturing firms. Also, explain the target costing process for a new product.Target Costing Slide 8-23Learning objective 2: Explain the cost-plus approach to pricing and why it is inherently circular for manufacturing firms. Also, explain the target costing process for a new product.Target costing:Requires specification of desired level of profitAdds desired profit to existing costsIs used primarily with products that are already in productionLeads to profit maximizationAnswer: aRequires specification of desired profitSlide 8-24Test Your Knowledge 4Learning objective 2: Explain the cost-plus approach to pricing and why it is inherently circular for manufacturing firms. Also, explain the target costing process for a new product.Analyzing Customer ProfitabilityCustomer Profitability Measurement System (CPM)Indirect costs of servicing customers are assigned to cost poolsIndirect costs include processing orders, handling returns, and shipmentsCosts are allocated to specific customers using cost drivers to determine customer profitabilitySubtracting these costs and product costs from customer revenue yields a measure of customer profitabilitySlide 8-25Learning objective 3: Analyze customer profitability, and explain the activity-based pricing approach.Customer profitability is measured as:Revenue minus cost of goods soldRevenue minus indirect manufacturing costsRevenue minus cost of goods sold minus indirect service costsRevenue minus cost of goods sold minus indirect manufacturing costsAnswer: cRevenue minus cost of goods sold minus indirect service costsSlide 8-26Test Your Knowledge 5Learning objective 3: Analyze customer profitability, and explain the activity-based pricing approach.Customer Profitability Measurement SystemSlide 8-27Learning objective 3: Analyze customer profitability, and explain the activity-based pricing approach.Cost Pools and Cost Drivers to Service CustomersSlide 8-28Learning objective 3: Analyze customer profitability, and explain the activity-based pricing approach.Customer Profitability AnalysisSlide 8-29Learning objective 3: Analyze customer profitability, and explain the activity-based pricing approach.A customer profitability measurement (CPM) system does all of the following EXCEPT:Allocates indirect costs to individual customersTraces revenue to individual customersTraces cost of goods sold to individual customersTraces costs to individual productsAnswer: dTraces costs to individual productsSlide 8-30Test Your Knowledge 6Learning objective 3: Analyze customer profitability, and explain the activity-based pricing approach.Customer Profitability AnalysisSlide 8-31Learning objective 3: Analyze customer profitability, and explain the activity-based pricing approach.Customer Profitability and Performance MeasuresSome examples of performance measures that will drive managers to improve customer profitabilityPercent of customers who are not profitableDollar loss for customers who are not profitableAverage profit per customerNumber of customer service requests per 100 customersPercent of customers who return itemsDollar value of returned itemsSlide 8-32Learning objective 3: Analyze customer profitability, and explain the activity-based pricing approach.Activity-Based PricingCustomers are presented with separate prices for services they request in addition to the cost of goods purchasedCustomers will carefully consider the services they requestMay lead them to impose less cost on the supplierAlso called menu-based pricingSlide 8-33Learning objective 3: Analyze customer profitability, and explain the activity-based pricing approach.Activity-Based PricingCustomers might object as the price they pay should cover these costsWays to deal with this resistanceLower prices slightly and then encourage customers to make fewer but larger purchasesCustomers could be encouraged to limit the variety of goods they orderActivity-based pricing could be used only on the least profitable customersSlide 8-34Learning objective 3: Analyze customer profitability, and explain the activity-based pricing approach.Pricing DecisionsSlide 8-35Learning objective 3: Analyze customer profitability, and explain the activity-based pricing approach.Copyright© 2016 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.Slide 8-36