As we will see, relevant costs for long-term pricing decisions include all future fixed and variable costs. Understand how companies make long-term pricing decisions. Consider all future variables and fixed costs as relevant and earn a targeted return on investment. Compare relevant costs for long-term pricing decisions (all variable and fixed costs) with relevant costs for short-term pricing decisions (costs that change in the short term, mostly but not exclusively variable costs).
Learning Objective 5
Examples of non-value-added costs are the costs of producing defective products and the cost of machine breakdowns. But Provalue's direct material cost per unit is locked in or designed in much earlier, when product designers select Provalue's components. that have already happened, will happen in the future. For example, scrap and rework costs incurred during production are often closed much earlier due to faulty design.
Similarly, in the software industry, costly and hard-to-fix bugs that occur during coding and testing are often locked in by poor software design and analysis. The curve below uses the information from Exhibit 12-2 to show the cumulative unit costs incurred in the various business functions of the value chain. But notice the big difference between when costs are locked in and when they are incurred.
Value engineering reduces both value-added costs (by designing Provalue II to reduce direct material and component costs, direct production labor hours, and test hours) and non-value-added costs (by simplifying Provalue II design to reduce rework Reduce). For comparison, Figure 12-5 also shows the actual production costs in 2011 per unit of Provalue from Figure 12-1.
Learning Objective 6
Because a markup is added, cost-based pricing is often referred to as cost-plus pricing, where plus refers to the markup component. In the long run, the price of the product must exceed the full cost of the product if the company is to stay in business. The final design and cost plus price must take into account cost, markup and customer responses.
A target price approach reduces the need to search back and forth between estimated prices plus costs, customer feedback, and design modifications. In contrast to cost-plus pricing, target pricing first determines product characteristics and target price based on customer preferences and expected competitor responses, and then calculates target costs. Suppliers that offer unique products and services, such as accountants and management consultants, typically use cost-plus pricing.
Professional services firms price on an hourly basis plus charging partners, managers and associates. Service businesses such as home repair services, auto repair services, and architectural firms use a cost-plus method called the time-and-materials method.
Learning Objective 7
Companies sometimes need to consider target prices and target costs over a multi-year product life cycle. For automobile companies such as DaimlerChrysler, Ford and Nissan, the product life cycle is 12 to 15 years to design, introduce and sell different car models. Exhibit 12-6 presents the six-year life cycle budget for the General Ledger for three alternative sales price/sales-quantity combinations.
Life cycle budgeting emphasizes costs throughout the product life cycle, thereby facilitating target pricing, target costing, and value engineering at the design stage before costs are committed. Insight decides to sell the ledger package for $480 per package because this price maximizes the company's bottom line over its entire lifecycle. Figure 12-6 assumes that the sales price per package is the same throughout its life cycle.
Environmental costs incurred over several years of the product life cycle are often captured at the product and process design stage. Describe life cycle budgeting and life cycle costing and when companies should use these techniques.
Learning Objective 8
Can this price difference be explained by the difference in the cost to the airline of these return flights? What if economic conditions weaken to the point where business travelers become more sensitive to price? Peak tax prices occur in the telephone, telecommunications, hotel, car rental and electricity sectors.
Airlines charged high fares for flights to and from many cities in the region for roughly a month around the time of the games. These price differences arise because of differences in the purchasing power of consumers in different countries (a form of price discrimination) and government restrictions that may limit the prices that can be charged.䊏 The predatory company has a reasonable prospect of recovering in the future, through greater market share or higher prices, the money lost by pricing below cost.
Most courts in the United States have defined the "appropriate measure of cost" as short-run marginal or average variable costs.8 In Adjustor's Replace-a-Car v. Rent-a-Car, Adjustor's (the plaintiff) claimed that it was forced to withdraw from markets in Austin and San Antonio, Texas, because the Agency used predatory pricing.9 To demonstrate predatory pricing, the Adjustor pointed to a "net operating loss" in the Agency's income statement calculated after the Agency's headquarters were awarded. above the head.
Learning Objective 9
Robinson-Patman Act, a manufacturer cannot price discriminate between two customers if the purpose is to lessen or prevent competition for customers. The court held that pricing below average variable costs is not predatory unless the company has a reasonable chance of later raising prices or market share to recoup its losses.10 The defendant, BWT, a cigarette manufacturer, sold cigarettes brand and had 12% of the cigarette market. BWT responded by introducing its own version of generics priced below average variable cost, thus making it difficult for generic manufacturers to stay in business.
That's because, given BWT's small 12% market share and existing competition within the sector, BWT would not be able to charge a monopoly price later to make up for the losses. Cases related to dumping have occurred in the cement, computer, lumber, paper, semiconductor, steel, sweater and tire industries. For example, in 2008, LG agreed to pay $400 million and Sharp $120 million for conspiring to fix the prices of LCD picture tubes in the United States.
To maintain its target profitability of $16 million, or $80 per unit, Astel will need to reduce Provalue II costs by $6 million, or $30 per unit. Astel aims to reduce manufacturing costs by $4 million, or $20 per unit, and by $2 million, or $10 per unit, in marketing, distribution and customer service costs.
Problem for Self-Study
Collusive pricing occurs when companies in an industry collude in their pricing and production decisions to achieve a price above the competitive price and thus restrict trade. Astel's marketing manager realizes that a further price reduction is necessary to sell 200,000 units of Provalue II. Will the proposed changes achieve Astel's targeted reduction of $4 million, or $20 per unit, in production costs for Provalue III?
Solution
Decision Points
Locked-in costs are costs that have not yet been incurred, but will be incurred in the future based on decisions already made. To reduce costs, techniques such as value engineering are most effective before costs are committed. The cost-plus approach to pricing adds a markup component to a cost base as a starting point for pricing decisions.
Many different costs, such as full cost of the product or manufacturing costs, can serve as the cost base when using the cost-plus formula. Life cycle budget estimates and life cycle costing track and accumulate the costs (and revenues) attributable to a product from its initial R&D to its final customer service and support. These life cycle techniques are particularly important when (a) a high percentage of the total life cycle cost is.
Peak load pricing involves charging a higher price for the same product or service when demand approaches the limits of physical capacity. In price discrimination and peak load pricing, prices differ across market segments and time periods, even though the costs of providing the product or service are approximately the same.
Terms to Learn
Assignment Material
How much of the total of the seven costs is value-added and how much is non-value-added. How much of the total costs in 2012 are value-added, non-value-added, or in the gray area between. By redesigning the warehouse layout and reconfiguring the crates in which the marble slabs are moved, Snappy expects to reduce the number of loads moved to 3,125 and the cost per load moved to $28.
Due to the rapidly changing nature of the toy industry, Gadzooks management projects that the robot will only be produced and sold for three years. At the end of the product's life cycle, Gadzooks plans to sell the rights to the robot to an overseas company for $250,000. 12-28 Cost plus, target price, working backwards. The new director of Radco Manufacturing has requested various information about the firm's operations from the past year.
Direct manufacturing labor costs for the new CE100 are expected to be lower by $0.50 per unit. Assume that the price per unit for each cost driver for CE100 continues to apply to New CE100. The current owners of the site will sign the site over to New Life at no cost.
At what price should New Life sell the land at the end of the project to achieve the target profit per tonne?
