review24 - CHAPTER 24 Pricing Decisions, Including Target...

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Pricing Decisions, Including Target Costing and Transfer Pricing 0REVIEWING THE CHAPTER Objective 1: Identify the objectives and rules used to establish prices of goods and services, and relate pricing issues to the management process. 10. A company’s long-term objectives should include a pricing policy. Possible pricing objectives include (a) identifying and adhering to short-run and long-run pricing strategies, (b) maximizing profits, (c) maintaining or gaining market share, (d) setting socially responsible prices, (e) maintaining a minimum rate of return on investment, and (f) being customer-focused. 20. Pricing strategies depend on many factors and conditions. Identifying the market being served and meeting the needs of that market are of primary importance. Companies that make standard products for a competitive market have different pricing strategies from firms that make products to customers’ specifications. 30. For a company to stay in business, the selling price of its product or service must (a) be competitive with the competition’s price, (b) be acceptable to the customer, (c) recover all costs incurred in bringing the product or service to market, and (d) return a profit. If a manager deviates from any of these four selling rules, there must be a specific short-run objective that accounts for the change. Breaking these pricing rules for a long period will force a company into bankruptcy. 40. Pricing issues are addressed at each step of the management process. When managers plan, they must decide how much to charge for each product or service. During the performing step, the product or service is sold at the specified price or on the auction market. When managers evaluate performance, they review sales to determine which pricing strategies were successful and which failed. To communicate about performance inside the organization, managers prepare analyses of actual and targeted prices and profits. 50. When making and evaluating pricing decisions, managers must consider many factors, some relating to the market and others to internal constraints. Factors related to the market include the demand for the product, customer needs, competition, and the quantity and quality of competing products or services. Internal constraints include the cost of the product or service, the desired return on investment, the quality and quantity of materials and labor, and the allocation of scarce resources. Objective 2: Describe economic pricing concepts, including the auction-based pricing method used on the Internet. 60. The economic approach to pricing is based on microeconomic theory. A product’s total revenue and total costs are plotted against units produced. Initially, because of fixed costs, the cost line is above the revenue line, illustrating a loss. When enough products are produced and sold to cover both variable and fixed costs, the lines cross, illustrating a profit. However, the lines are destined to cross again. Price competition will eventually bend the
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review24 - CHAPTER 24 Pricing Decisions, Including Target...

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