Acc550-ch 12 - ACC550 CHAPTER 12 PRICING DECISIONS &...

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ACC550 CHAPTER 12 Discussion of short run pricing decisions Short run pricing decisions typically have a time horizon of less than one year. In other words, they involve decisions whose impact will last less than one year. A typical decision is deciding whether or not to accept a one time special order. If you think about it, the concepts involved in short run pricing decisions are essentially the same as those discussed in our analysis of relevant revenues, relevant costs and decision making from the prior chapter. With short run decisions, we focus on the INCREMENTAL profit associated with a particular alternative rather than the TOTAL profit of the business as a whole. In other words, we do not necessarily focus on whether or not the business as a whole is meeting its overall return on investment objectives. Rather, we focus on how much profit a particular alternative will ADD to the overall profit of the business. Again, with short term pricing decisions, we focus on the expected financial results of ONE particular alternative at a time. As such, we focus on the incremental revenues and costs associated with a particular alternative…….the revenues and costs that will change based on the particular alternative being considered. The relevant costs tend to be variable, but they may be fixed as well. Typical relevant variable costs include direct materials, direct labor and variable distribution costs. An example of a relevant fixed cost would be the purchase price of a piece of test equipment required to produce the special order. Long run pricing decisions 1) Long run pricing decisions focus on the TOTAL profit of the business as a WHOLE a) Such decisions focus on the OVERALL return on investment expected to be achieved by the business as a whole. Discussion point: To help understand the difference between long run and short run pricing decisions, think of the distinction this way: At their extreme, short run pricing decisions focus on whether or not a particular decision alternative should be pursued. At their extreme, long run pricing decisions focus on whether or not the business as a whole should continue to exist. 2)
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Acc550-ch 12 - ACC550 CHAPTER 12 PRICING DECISIONS &...

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