P demand marginal cost q marginal quantity made

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Unformatted text preview: ining Price and Quantity Total cost Total revenue Dollars Total profit at the profit-maximizing quantity and price, q* and p*. q* Quantity made and sold 1-36 per month Profit-Maximizing Model – Limitations 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, e.g. oligopolistic market Marginal cost is difficult to measure. 1-37 Economic vs. Accounting Models in Pricing decisions 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 Accounting productmarginal-revenue data cost data More costly Less costly The best approach, in terms of costs and benefits, typically lies between the extremes. 1-38 Cost-Plus Pricing Price = Cost + (Markup percentage X Cost) Full-absorption cost • Justifiable and equitable since all costs are covered • provides insights on how competitors set prices in a transparent industry • Subject to accounting principles • Subject to arbitrary cost allocation • Inconsistent with CVP analysis that calculates the floor price based on variable costs Cost-Plus Pricing Price = Cost + (Markup percentage X Cost) Variable cost • • • • Shows the cost behavior patterns Not subject to arbitrary cost allocation Consistent with CVP analysis Helps in making decisions. Cost-Plus Pricing Price = Cost + (Markup percentage X Cost) How to derive the markup % ? Target Costing Set the Price => Target Profit => Target Cost • The opposite of traditional pricing models Time and Material Pricing Used by construction companies, printers, and professional service firms. Price is the sum of labor and material charges. 1-43 Time and Material Pricing Time charges: Hourly labor cost + Overhead cost per labor hour + Hourly charge to provide profit margin Total × labor hours required Material Charges: Total material cost incurred + Overhead per dollar of material cost × Total material cost incurred 1-44 3 Key Takeaways for ME...
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