1. Copyright © 2003 Pearson Education Canada Inc. Slide 12-131 Chapter 12 Pricing Decisions, Product Profitability Decisions, and Cost Management

2. Copyright © 2003 Pearson Education Canada Inc. Slide 12-132 Major Influences on Pricing The three major influences on pricing decisions: 1.Customers examine pricing problems through the eyes of the customer 2.Competitors think about prices as part of the total marketing package and strategic positioning of the company and its products 3.Costs prices must cover all costs in the long-run important to know what your costs are Pages 452 - 453

3. Copyright © 2003 Pearson Education Canada Inc. Slide 12-133 Costing and Pricing for the Long Run Accurate product cost information is essential In many industries, competitive market forces set prices (oil & gas, mining) Two Alternative Long-Run Pricing Approaches 1.Market-based What do our customers want and what are our competitors doing? 2.Cost-based (or cost-plus) What price should we charge to cover our costs and earn a profit? Pages 455 - 458

4. Copyright © 2003 Pearson Education Canada Inc. Slide 12-134 Target Costing for Target Pricing Target price is the estimated price for a product or service that potential customers will be willing to pay Based on an understanding of customers’ perceived value for a product and competitors’ responses Target cost per unit is the estimated long-run cost per unit of product or service that, when sold at the target price, enables the company to achieve its target income 4 Steps in Target Pricing and Target Costing 1.Develop a product that satisfies a customer need 2.Choose target price based on customers’ values 3.Derive a target cost 4.Perform value engineering to achieve target costs Pages 458 - 460

5. Copyright © 2003 Pearson Education Canada Inc. Slide 12-135 Cost Incurrence and Locked-In Costs Cost incurrence occurs when a resource is sacrificed or used up Locked-in (or designed-in) costs are costs that have not yet been incurred but are committed to be spent Cumulative Costs per unit $ R&DMarketing, andManufacturingDistribution & DesignCustomer Service Value- Chain Functions Locked-in cost curve Cost incurrence curve Pages 460 - 462

6. Copyright © 2003 Pearson Education Canada Inc. Slide 12-136 Cost Plus Pricing Most companies establish prices using either a market-based or cost-based approach Cost plus pricing begins with some form of product or service cost and adds on an appropriate mark-up Variable manufacturing+65% markup=$797 costs $483.00 Total manufacturing+50% markup=$810 costs $540.00 Full costs $720.00+12% markup=$806 Pages 464 - 467

7. Copyright © 2003 Pearson Education Canada Inc. Slide 12-137 Cost-Plus Target Rate of Return on Investment One approach to determining the markup % is to consider the desired rate of return on the organization’s invested capital Invested capital$96,000,000(a) Target rate of return on investment 18%(b) Target operating income$17,280,000(a x b) Total expected unit sales of product200,000(c) Target operating income per unit$86.40(a x b / c) Cost baseTarget operating incomeTarget selling $720.00per unit $86.40price $806.40 += Pages 464 - 465

8. Copyright © 2003 Pearson Education Canada Inc. Slide 12-138 Life Cycle Product Budgeting and Costing Product life cycle spans the time from initial R&D to the time at which support from the customers is withdrawn Life Cycle Budgeting Budget revenues and costs over the life cycle of the product or service Life Cycle Costing Track and accumulate costs over the life cycle of the product or service “cradle-to-grave” costing “womb-to-tomb” costing Pages 469 - 472