Kế toán, kiểm toán - Chapter 15: Target costing and cost analysis for pricing decisions

Prices are determined by the market, subject
to costs that must be covered in the long run.

Prices are based on costs, subject to
reactions of customers and competitors.

 

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Target Costing and Cost Analysis for Pricing DecisionsChapter 15Major Influences on Pricing DecisionsPricing DecisionsPolitical, legal, and image issuesCompetitorsCostsCustomer demandHow Are Prices Set?CostsMarket ForcesPrices are determined by the market, subject to costs that must be covered in the long run.Prices are based on costs, subject to reactions of customers and competitors.Economic Profit-Maximizing PricingFirms usually have flexibility in setting prices.The quantity sold usually declines as the price is increased.Total Revenue CurveTotal revenueCurve is increasing throughout its range, but at a declining rate.DollarsQuantity sold per monthDemand Schedule and Marginal Revenue CurveDemandSales price must decrease to sell higher quantity.Dollars per unitQuantity sold per monthMarginal revenueRevenue per unit decreases as quantity increases.Total Cost CurveDollarsQuantity made per monthTotal cost increases at a declining rate.Total cost increases at an increasing rate.Quantity made per monthMarginal Cost CurveMarginal costDollars per unitQuantity where marginal cost begins to increase.Quantity made and sold per monthDetermining the Profit-Maximizing Price and QuantityDollars per unitDemandMarginal revenueMarginal costq*p*Quantity made and sold per monthDetermining the Profit-Maximizing Price and QuantityDollars per unitDemandMarginal revenueq*p*Marginal costProfit is maximized where marginal cost equals marginal revenue, resulting in price p* and quantity q*.Determining the Profit-Maximizing Price and QuantityTotal revenueDollarsTotal costTotal profit at the profit-maximizing quantity and price, q* and p*.Quantity made and sold per monthq*Price ElasticityThe impact of price changes on sales volumeDemand is elastic if a price increase has a large negative impact on sales volume.Demand is inelastic if a price increase has little or no impact on sales volume.Cross ElasticityThe extent to which a change in a product’s price affects the demand for other substitute products.Limitations of the Profit-Maximizing Model A firm’s demand and marginal revenue curves are difficult to discern with precision. The marginal revenue, marginal cost paradigm is not valid for all forms of markets. Marginal cost is difficult to measure.Role of Accounting Product Costs in PricingSophisticated decision model and information requirementsSimplified decision model and information requirementsOptimal DecisionsSuboptimal DecisionsEconomic pricing modelCost-based pricingMarginal-cost and marginal-revenue dataAccounting product- cost dataMore costlyLess costlyThe best approach, in terms of costs and benefits, typically lies between the extremes.

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