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Lecture Managerial accounting: Creating value in a dynamic business environment (9/e): Chapter 15 - Ronald W. Hilton

Chapter 15 - Target costing and cost analysis for pricing decisions. After completing this chapter, you should be able to: List and describe the four major influences on pricing decisions, explain and use the economic, profit-maximizing pricing model, set prices using cost-plus pricing formulas, discuss the issues involved in the strategic pricing of new products. | Target Costing and Cost Analysis for Pricing Decisions Chapter 15 Major Influences on Pricing Decisions Pricing Decisions Political, legal, and image issues Competitors Costs Customer demand Learning Objective 1 How Are Prices Set? Costs Market Forces 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. Learning Objective 2 Economic Profit-Maximizing Pricing Firms usually have flexibility in setting prices. The quantity sold usually declines as the price is increased. Total Revenue Curve Total revenue Curve is increasing throughout its range, but at a declining rate. Dollars Quantity sold per month Demand Schedule and Marginal Revenue Curve Demand Sales price must decrease to sell higher quantity. Dollars per unit Quantity sold per month Marginal revenue Revenue per unit decreases as quantity increases. Total Cost Curve Dollars Quantity made per month Total cost . | Target Costing and Cost Analysis for Pricing Decisions Chapter 15 Major Influences on Pricing Decisions Pricing Decisions Political, legal, and image issues Competitors Costs Customer demand Learning Objective 1 How Are Prices Set? Costs Market Forces 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. Learning Objective 2 Economic Profit-Maximizing Pricing Firms usually have flexibility in setting prices. The quantity sold usually declines as the price is increased. Total Revenue Curve Total revenue Curve is increasing throughout its range, but at a declining rate. Dollars Quantity sold per month Demand Schedule and Marginal Revenue Curve Demand Sales price must decrease to sell higher quantity. Dollars per unit Quantity sold per month Marginal revenue Revenue per unit decreases as quantity increases. Total Cost Curve Dollars Quantity made per month Total cost increases at a declining rate. Total cost increases at an increasing rate. Quantity made per month Marginal Cost Curve Marginal cost Dollars per unit Quantity where marginal cost begins to increase. Quantity made and sold per month Determining the Profit-Maximizing Price and Quantity Dollars per unit Demand Marginal revenue Marginal cost q* p* Quantity made and sold per month Determining the Profit-Maximizing Price and Quantity Dollars per unit Demand Marginal revenue q* p* Marginal cost Profit is maximized where marginal cost equals marginal revenue, resulting in price p* and quantity q*. Determining the Profit-Maximizing Price and Quantity Total revenue Dollars Total cost Total profit at the profit-maximizing quantity and price, q* and p*. Quantity made and sold per month q* Price Elasticity The impact of price changes on sales volume Demand 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