Download Hilton 5th Edition Chapter Fifteen

Chapter 15
Target Costing and
Cost Analysis for
Pricing Decisions
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Major Influences on
Pricing Decisions
Customer
demand
Political, legal,
and image issues
Pricing
Decisions
Competitors
Costs
15-2
How Are Prices Set?
Prices are determined by the market, subject
to costs that must be covered in the long run.
Costs
Market
Forces
Prices are based on costs, subject to
reactions of customers and competitors.
15-3
Economic Profit-Maximizing
Pricing
Firms usually have flexibility in setting prices.
The quantity sold usually
declines as the price is increased.
15-4
Total Revenue Curve
Dollars
Total revenue
Curve is increasing throughout
its range, but at a declining rate.
Quantity sold
per month
15-5
Demand Schedule and Marginal
Revenue
Curve
Dollars
per unit
Sales price must decrease
to sell higher quantity.
Demand
Revenue per
Marginal
unit decreases
revenue
as quantity increases.
Quantity sold
per month
15-6
Total Cost Curve
Dollars
Total cost increases
at an increasing rate.
Total cost increases
at a declining rate.
Quantity made
per month
15-7
Marginal Cost Curve
Dollars
per unit
Marginal
cost
Quantity where
marginal cost
begins to increase.
Quantity made
per month
15-8
Determining the Profit-Maximizing
Price and Quantity
Dollars
per unit
p*
Demand
Marginal
cost
q*
Marginal Quantity made
revenue
and sold
per month
15-9
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
q*
Marginal Quantity made
revenue
and sold
per month
15-10
Determining the Profit-Maximizing
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
per month
15-11
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.
15-12
Cross Elasticity
The extent to
which a change in
a product’s price affects the
demand for other
substitute products.
15-13
Limitations of the
Profit-Maximizing Model
1. A firm’s demand and marginal revenue
curves are difficult to discern with
precision.
2. The marginal revenue, marginal cost
paradigm is not valid for all forms of
markets.
3. Marginal cost is difficult to measure.
15-14
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
Accounting productmarginal-revenue data
cost data
More costly
Less costly
The best approach, in terms of costs and
benefits, typically lies between the extremes.
15-15