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Managing Finance and Budgets
Seminar 6
Seminar Six - Activities
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Preparation: read Chapter 11
Describe key concepts:
Activity based costing
Pricing strategies
Cost plus pricing
Marginal cost pricing
Penetration pricing
Price skimming
Exercises 11.4 (page 365) and 11.8 - pages 367-8
Starting Points (1)



Define what is meant by the following:
 Fixed Costs
 Variable Costs
 Direct Costs
 Indirect Costs
Give an example of a Fixed Cost which may be a Direct.
Give an Example of a Direct Cost which is Variable.
Starting Points (2)


Define what is meant by the following:
 Activity-Based Costing
 Cost Pool
 Cost Driver
What sorts of cost drivers are generally used to allocate
costs from the cost pool to various activities?
Some Economic Theory (1)




Explain how the graph on the next slide describes how the
market responds to a price increase.
Explain how the market can respond differently to the same
price rise in two different commodities A and B, using the
next two slides.
What is meant by the term ‘Elasticity of Demand’?
Which of the commodities, A or B has the higher elasticity of
demand?
Graph of quantity demanded against price for
commodity A
Price per
unit (£)
P2
P1
Q2
Q1
Quantity (units)
Graph of quantity demanded against price for
commodity B
Price per
unit (£)
P2
P1
Q2
Q1
Quantity (units)
Example (A)




Widgets and Wodgets both cost 15p each to make.
Market research suggests that for a selling price of
£1.00, the market will support sales of 100 of each type
of item. What total profit will we make?
Market Research suggests that for widgets, each price
reduction of 10p we make from the original selling price, will
increase our sales by 100 widgets.
Market Research suggests that for wodgets, each price
reduction of 5p we make from the original selling price, we
will increase our sales by 100 wodgets.
Which item, widgets or wodgets has the higher elasticity of
demand?
Example (A) - Solution

Widgets and Wodgets both cost 15p each to make. Market research
suggests that for a selling price of £1.00, the market will support sales of
100 of each type of item. What total profit will we make?

Turnover:
Cost
Profit


100 x £1.00
100 x 15p
=
=
£100
£ 15
£ 85
Example (A) – Solution 1
Widgets
Sales Price
100
100p
200
90p
300
80p
400
70p
500
60p
600
50p
700
40p
800
30p
900
20p
1000
10p
Price
100
90
80
70
60
50
40
30
20
10
0
100
200
300
400
500
This shows a relatively
inelastic demand pattern
600
700
800
900
Sales
1000
Example (A) – Solution 2
Wodgets
Sales Price
100
100p
200
95p
300
90p
400
85p
500
80p
600
75p
700
70p
800
65p
900
60p
1000
55p
Price
100
90
80
70
60
50
40
30
20
10
0
100
200
300
400
This shows a relatively
elastic demand pattern
500
600
700
800
900
Sales
1000
Some Economic Theory (2)



Describe briefly what the graphs on the next two slides
show.
Why is the first graph a straight line, increasing?
Why is the second graph a curve, with a downwards dip at
the end?
Graph of total cost against quantity (volume) of
output of product X
Cost
(£)
Quantity (units)
Graph of total sales revenue against quantity
(volume) sold of product X
Sales
revenue
(£)
Quantity (units)
Example (B)




Widgets and Wodgets both cost 15p each to make.
Market research suggests that for a selling price of
£1.00, the market will support sales of 100 of each type
of item.
Market Research suggests that for widgets, each price
reduction of 10p we make from the original selling price, will
increase our sales by 100 widgets.
Market Research suggests that for wodgets, each price
reduction of 5p we make from the original selling price, we
will increase our sales by 100 wodgets.
Calculate, for each item, the total turnover for the different
levels of sales. What is the maximum turnover for each
item?
Example (B) – Solution 1
Widgets
Sales Price
100
100p
200
90p
300
80p
400
70p
500
60p
600
50p
700
40p
800
30p
900
20p
1000
10p
Turnover
£100
Turn£180
Over
£240
£280
£300
£300
£280
£240
£180
£100
300
250
200
150
100
50
0
100
200
300
400
500
600
In fact, Maximum turnover of £302.50
occurs at sales of 550 widgets
700
800
900
1000
Sales
Example (B) – Solution 2
Wodgets
Sales Price
100
100p
200
95p
300
90p
400
85p
500
80p
600
75p
700
70p
800
65p
900
60p
1000
55p
1100
50p
1200
45p
600
Turnover
£100
Turn- 500
£190
Over 400
£270
£340
300
£400
200
£450
£490
100
£520
£540
0
100 200 300 400 500 600 700 800 900 1000 1100 1200
£550
Sales
£550 In fact, Maximum turnover of £551.25
£540 occurs at sales of 1050 widgets
Some Economic Theory (3)



Explain what the graph on the next slide shows.
Why does the point of maximum profit occur where it does,
rather than at the highest point on the curve?
If we applied Break-Even Analysis to this situation, would we
have got the same answer? If not, why not?
Graph of total sales revenue and total cost
against quantity (volume) of output of product X
Cost
(£)
Total sales
revenue
Maximum profit
Total cost
Optimum
level of sales
Quantity (units)
Example (C)




Widgets and Wodgets both cost 15p each to make.
Market research suggests that for a selling price of
£1.00, the market will support sales of 100 of each type
of item.
Market Research suggests that for widgets, each price
reduction of 10p we make from the original selling price, will
increase our sales by 100 widgets.
Market Research suggests that for wodgets, each price
reduction of 5p we make from the original selling price, we
will increase our sales by 100 wodgets.
Calculate, for each item, the total profit for the different
levels of sales. What is the maximum profit for each item?
Example (C) – Solution 1
Widgets
Sales Price
100
100p
200
90p
300
80p
400
70p
500
60p
600
50p
700
40p
800
30p
900
20p
1000
10p
T/Over
£100
£180
£240
£280
£300
£300
£280
£240
£180
£100
250
Profit
200
£85
£150
150
£195
£220
100
£225
50
£210
Profit
£175
0
£120
-50
£55
100 200 300 400 500
-£50
Maximum profit £225 occurs
at sales of 500 widgets
600
700
800
Sales
900
1000
Example (C) – Solution 2
Wodgets
Sales Price
100
100p
200
95p
300
90p
400
85p
500
80p
600
75p
700
70p
800
65p
900
60p
1000
55p
1100
50p
1200
45p
T/Over
£100
£190
£270
£340
£400
£450
£490
£520
£540
£550
£550
£540
450
Profit
400
£85
350
£160
300
£225
250
£270
200
£325
150
£360
Profit 100
£385
50
£400
0
£405
100 200 300 400 500 600 700 800
£400
£385 Maximum profit £405 occurs
£360 at sales of 900 wodgets
900 1000 1100 1200
Sales
Starting Points (3)
Explain what is meant by:
 A pricing strategy
 Cost plus pricing
 Marginal cost pricing
 Penetration pricing
 Price skimming
Exercises
M & A Exercise 11.4
 M & A Exercise 11.8

Total Life-Cycle Costing



Specify the three phases in the ‘Life-Cycle’ of a product.
Describe the costs that might be accrued in each of these
phases from the various activities.
There is a tension between traditional Management
Accounting and the Life-Cycle cost method. What is this?
The total lifecycle of a product
The lifecycle
of a product
Research and
development
production set-up
pre-production
marketing costs
Manufacturing
and
marketing costs
After-sales service
and production
facilities
decommissioning
costs
Pre-production
phase
Production
phase
Post-production
phase