Management Accounting Ch05_stu.pptVIP

* * * * * * * * * * * * * * * * * * * * * * * * * * * * The Concept of Pricing In perfect competition, all competing firms sell the same type of product at the same price. Marginal cost is the additional cost resulting from producing and selling one additional unit. Marginal revenue is the additional revenue resulting from the sale of one additional unit. The Concept of Pricing In imperfect competition, the price a firm charges for a unit will influence the quantity of units it sells. Price elasticity is the effect of price changes on sales volume. The firm must reduce prices to generate additional sales. Pricing and Accounting Accountants seldom compute marginal revenue curves and marginal cost curves. They use estimates based on judgment. They examine selected volumes, not the range of possible volumes. Learning Objective 6 General Influences on Pricing in Practice General Influences on Pricing in Practice Legal requirements Competitors’ actions Customer demands Learning Objective 7 Cost-plus Pricing Cost-Plus Pricing Setting prices by computing an average cost and adding a (the amount by which sales price exceeds cost). Target prices can be based on a host of different markups that are in turn based on a host of different definitions of cost. Cost-plus pricing is widely used in industries where revenue is based on cost reimbursement. Various cost bases for pricing Cost per unit Sales (Unit price: ?) Variable expenses: Manufacturing $24.0 Selling and administrative 2.2 Unit variable costs 26.2 Fixed expenses Manufacturing $ 6.0 Selling and administrative 5.8 Unit fixed costs 11.8 Full costs 38.0 Cordell Company makes and sells 1,000,000 seat covers. Compute Sales Prices by Various Approaches as a percentage of variable manufacturing costs as a percentage of total variable costs as a percentage of full cost