Page 295 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes 14.3 Factors Affecting Pricing Decisions

Before a decision on the pricing is made, certain factors need to be consider:
1. What are the objectives of the company — to maximize profit/to gain market share/to
penetrate the new market, etc.?
2. What are the existing economic conditions?
3. Any government regulations;

4. Cost structure of the organization;
5. Demand for the product which should includes a study of the price elasticity of demand;
6. Inflation;
7. Surplus production capacity;
8. Level of competition; and

9. Political scenario.

14.4 Methods of Pricing

The various methods of pricing include the following:
1. Full cost pricing;

2. Variable/Marginal cost plus pricing;
3. Rate of return pricing;
4. Break-even pricing;
5. Minimum pricing

14.4.1 Full Cost Pricing

Full Cost Pricing is a traditional method of pricing a product. It has following features:

1. Most commonly used method;
2. Prices are set by adding a percentage of profit (either a mark up or a margin) to the total
cost of the product;

3. Consistent with the absorption costing technique;
4. Commonly used by wholesalers, retailers, construction contractors, services, government
contractors.

Full Cost Pricing is useful in situation where:
1. Products are made based on specification by the customers;
2. Main objective is to make profit after considering fixed costs of the business;
3. The costs are difficult to estimate in advance;

4. Expected demand at different price levels is difficult to estimate.

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