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Unformatted text preview: Chapter 8 Pricing Decisions, Analyzing Customer Profitability, and Activity-Based Pricing QUESTIONS 1. The manager would estimate the quantity that could be sold at various prices. The quantities would then be multiplied by the contribution margin per unit and fixed costs would be subtracted from the total contribution margin, yielding an estimate of profit at each price. The price that yields the highest profit is the profit maximizing price. 2. The cost-plus price is based on full cost per unit. However, to determine full cost per unit, one must first estimate the quantity that can be sold. But the quantity that can be sold depends on the price! 3. The target cost depends on price, and marketing staff is needed to determine product features and price. Engineers are needed to determine efficient production methods given the product features. And cost accountants are needed to estimate costs given the production process. A cross functional team helps ensure good communication among these various parties, increasing the likelihood that a product will be put into production that can be produced for the target cost. 4. In customer profitability analysis, indirect costs are grouped into cost pools (e.g., the cost pool related to processing fax orders, the cost pool related to processing Internet orders, the cost pool related to shipping, etc.). The costs are then allocated to customers using various cost drivers (allocation bases) to determine customer profitability. 5. With activity-based pricing, customers are charged for various services. For example, there might be separate charges for delivery, for rush orders, and for returns. This way, customers that impose high costs on a supplier will pay for the services they demand. Jiambalvo Managerial Accounting EXERCISES E1. While the computers may be a commodity, the business processes used by Bell to produce and sell computers are a source of competitive advantage. Assuming Bell is better at these business processes than its competitors, it may make sense to lower prices and gain market share. While Bell may be able to generate significant profit even at lower prices, the lower prices may be ruinous for competitors. E2. The marketing vice-president may, in fact, be worried that some customers really will be dropped. This will reduce sales and may have a negative effect on his bonus (which is based on sales rather than profit). However, if no customers are going to be dropped and prices to less profitable customers are not going to be changed, then there is, indeed, no point in conducting the customer profitability study. E3. At the Web site “Destination CRM,” there was an article by Tom Richenbacher on “The Art of Customer Profitability Analysis.” http://www.destinationcrm.com/articles/default.asp?ArticleID=3038 According to this article, to perform customer profitability analysis, marketing, and service, costs must be traced to individual customers. Unless this is done, profitable customers may be lost through overpricing,...
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- Spring '10
- Pricing, Jiambalvo Managerial Accounting