AP

Management Accounting-Chapter 15&16

Chapter 15: Pricing — Overview

1. Introduction to Pricing

  • Discusses major influences on pricing, market structures, and common pricing methods.

  • Overview of chapter content covering:

    • Pricing influences

    • Types of competitive markets

    • Cost-based and demand-based pricing methods

2. Major Influences on Pricing

2.1 Types of Competitive Markets

  • Perfect Competition:

    • Many sellers, similar products, easy market entry/exit, market participants earn moderate profits.

    • Example: Apple industry with many identical producers.

  • Monopoly:

    • Single seller, no differentiation, high barriers to entry, profit maximization for the seller.

    • Example: Canada Post monopoly on domestic letters.

  • Oligopoly:

    • Few sellers, interdependent on pricing, can sell similar or different products.

    • Example: Canadian cellphone carriers.

  • Monopolistic Competition:

    • Many sellers, product differentiation, few barriers to entry.

    • Example: Fast food industry.

2.2 Relevant Costs

  • Short-Term Decisions: Focus on variable costs; example includes special orders.

  • Long-Term Decisions: Incorporate fixed costs and requires a strategy for stability and predictability.

3. Structure of Industry/Market

  • Market structure impacts pricing strategy:

    • Number of competitors.

    • Customer influence on prices.

    • Product differentiation.

    • Market entry barriers.

4. Product Life Cycle

  • Stages of Product Life Cycle:

    • Development: Costs incurred without revenue.

    • Introduction: Slow sales rise.

    • Growth: Rapid increase in sales.

    • Maturity: Sales plateau.

    • Decline: Sales loss; management strategies to extend maturity stage.

5. Cost-Based Pricing

  • Emphasis on costs in setting prices.

  • Common Strategies Include:

    • Life-cycle Costs: Prices set to recover costs over the product's life.

    • Target-Based Pricing: Set a target selling price and work backward to target costs.

    • Variable Product Costs: Set prices based on variable costs plus a markup.

    • Full Absorption Costs: Covers all costs, suitable for financial reporting.

6. Demand-Based Pricing

  • Focuses on perceived value and demand influences:

    • Strategies:

      • Predatory Pricing: Set prices below costs to drive out competitors (illegal).

      • Penetration Pricing: Low initial price to gain market share.

      • Price Skimming: Set high prices initially for early adopters; lower over time.

      • Price Bundling: Combined pricing for multiple products to create value.

      • Peak-Load Pricing: Higher prices during peak demand periods.

      • Loss-Leader Pricing: Sell at a loss to stimulate sales of other products.

7. Other Pricing Strategies

  • Value-Based Pricing: Setting prices based on perceived value and competitive landscape.

  • Reverse Engineering: Analyze competitors' costs to inform pricing decisions.

  • Considerations for Non-Profits and Public Sector: Pricing to cover costs versus profit generation.

Chapter Summary

  • Discusses key pricing strategies relevant to management accounting, influences on pricing, and systematic approaches for pricing decisions.

Practice Problem Examples

  • Example scenarios analyzed for product life cycles, market structure, and pricing strategies.

    • Svelte Co. example in clothing manufacturing focused on competitive pricing strategies based on market influences.