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Chapters 10

Chapters 10. Cost and Pricing Decision. Whose Cost?. Buyer’s cost – value analysis. Competitor’s cost – competitor’s staying power and floor of retaliation. Supplier’s cost – ability to develop and maintain a cost advantage.

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Chapters 10

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  1. Chapters 10 Cost and Pricing Decision

  2. Whose Cost? • Buyer’s cost – value analysis. • Competitor’s cost – competitor’s staying power and floor of retaliation. • Supplier’s cost – ability to develop and maintain a cost advantage. • Seller’s cost – pre-priced early in the R&D process; important to establish the price floor

  3. Cost Concepts • Direct cost – traceable and attributable directly to the product. • Indirect traceable cost – using some objective logic. • Common or general cost – can not be objectively traced to a product. • Opportunity cost – marginal income forgone by choosing one alternative over another; cost of not choosing the best alternative. • Cash and non-cash cost – Costs that lead to out of pocket or cash outlays or book-keeping (depreciation or amortization) enties. Cash flow = net income + depreciation + depletion + amortization

  4. Cost Behavior • Determinants of cost behavior – intrinsic and extrinsic. • Issue of recovering cost – full cost recovery; partial cost recovery based on contribution; hierarchy • Direct product, customer or sales territory cost. • Number 1 plus desired contribution to the costs of product, customer groups and sales region. • Number 1 and 2 plus contribution to the division, cost center, or total organization.

  5. Elements of profitability • Price per unit (Pi) • Cost: Variable cost per unit (VCi) and Fixed cost per period (FC) • Volume produced and sold (Qi) • Dollar sales mix of the offering.

  6. Break-Even Analysis • Decisions that convert costs from variable to fixed or vice versa. • Decision that reduce or increase costs. • Decision that increase sales volume or revenue. • Decision to change selling price.

  7. Break-Even Analysis BEQ = FC / (P-VC) 1 BEQ = Break even sales quantity FC = Fixed cost per period P = Price VC = direct variable cost per unit. BES = FC/PV 2 BES = Break even in sales revenue PV = profit volume or PV ratio PV = (P-VC)/P 3 Profit = (sales revenue x PV) – Fixed cost 4 PV = (Target profit +Fixed expense)/Sales revenue 5

  8. Break-Even Analysis Some limitations: • Variable costs remain proportional to volume at all output levels. • Costs are relevant over a limited range of volume.

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