1. Target Costing and Cost Analysis for Pricing Decisions
Chapter 15
Target Costing and Cost Analysis for Pricing Decisions

2. Major Influences on Pricing Decisions
Political, legal, and image issues
Competitors
Costs
Customer demand
Pricing Decisions
Learning Objective 1

3. How Are Prices Set? Market Forces Costs
Prices are determined by the market, subject to costs that must be covered in the long run.
Costs
Market Forces
Learning Objective 2
Prices are based on costs, subject to reactions of customers and competitors.

4. Economic Profit-Maximizing Pricing
Firms usually have flexibility in setting prices.
The quantity sold usually declines as the price is increased.

5. Quantity sold per month
Total Revenue Curve
Dollars
Total revenue
Curve is increasing throughout its range, but at a declining rate.
Quantity sold per month

6. Demand Schedule and Marginal Revenue Curve
Dollars per unit
Sales price must decrease to sell higher quantity.
Demand
Revenue per unit decreases as quantity increases.
Marginal revenue
Quantity sold per month

7. Total Cost Curve Dollars Total cost increases at an increasing rate.
Total cost increases at a declining rate.
Quantity made per month

8. Marginal Cost Curve Dollars per unit Marginal cost
Quantity where marginal cost begins to increase.
Quantity made per month

9. Determining the Profit-Maximizing Price and Quantity
Dollars per unit p*
Demand
Marginal cost
Marginal revenue
Quantity made and sold per month q*

10. Determining the Profit-Maximizing Price and Quantity
Dollars per unit
Profit is maximized where marginal cost equals marginal revenue, resulting in price p* and quantity q*. p*
Demand
Marginal cost
Marginal revenue
Quantity made and sold per month q*

11. Determining the Profit-Maximizing Price and Quantity
Total cost
Dollars
Total revenue
Total profit at the profit-maximizing quantity and price, q* and p*.
Quantity made and sold per month q*

12. The impact of price changes on sales volume
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 sales volume.

13. Cross Elasticity
The extent to which a change in a product’s price affects the demand for other substitute products.

14. 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.

15. Role of Accounting Product Costs in Pricing
Optimal Decisions
Suboptimal Decisions
Economic pricing model
Cost-based pricing
Sophisticated decision model and information requirements
Simplified decision model and information requirements
Marginal-cost and marginal-revenue data
Accounting product- cost data
Learning Objectives 3-11 can be found in the Text Book
More costly
Less costly
The best approach, in terms of costs and benefits, typically lies between the extremes.