Manac plc, is a big company which produces and sells a range of standard electrical goods. It is a multinational company whose production and sales take place across a number of countries. Current the company is using the standard costing and absorption costing as part of its approach to strategic management accounting.
But now it is worried about that the company is not meeting its budgeted target profits. The reason for the lower than expected profits may be very complex and the report is produced to explain the flowing: i. The models and concepts affecting the pricing decision and their usefulness ii. The role of variance analysis in management accounting and its limitation. iii. The advantages and disadvantages of introducing an Activity Based Costing system to replace the current Absorption Costing system.
Pricing decision is crucial and tricky: if the prices of our goods are set too high, customers will not buy our product and will choose the products of other companies instead. But if the prices are set too low, our cost will not be covered and thus we will be losing money. The problem the company has now may be attributed to pricing decision, so firstly I will introduce two decision making models along with a wide range of concepts concerning pricing decisions. When making pricing decisions, many factors have to be taken into consideration. Basic economic concepts provide an important foundation for fundamental pricing strategies. (Hasty, Reardon, 1999:457). Then some certain psychological price concepts should be taken into consideration. At last , the decision maker should understand the mechanics of making pricing calculations.
1. Supply demand curve:
One of the usual approaches in pricing in to mark up cost. (Garison & Noreen, 2003:805). Mark up of a product is the difference between its selling price and cost. The approach to express mark up cost is called cost-plus pricing: Selling price= cost +(Make up percentage*cost). For example , current our company uses a markup of 50%, and the cost of one of our dishwasher is £1000, so selling price is then £1500. So when making a pricing decision , two factors are crucial , one is the cost of the product, the other is the markup of the certain product. Concerning this , there are several concepts : Supply is the amount of some good our company can and will provide sell at various prices, assuming all determinants of supply other than the price of the good including technology and the prices of factors of production do not change. Demand represents the amount of some good that buyers are willing and able to purchase at various prices, assuming all determinants of demand other than the price of the good including income, personal tastes, the price of substitute goods, and the price of complementary goods do not change. In the long run, the price of the product should be set at the point when supply of the certain product equals the demand. This is shown in appendix A. And when price rises, according to the supply-demand curve, the demand will fall, which will lead to a fall in trade volume. For example , if we increase the price of our dishwasher to £2,000, the sales of these dishwashers will fall .Under this circumstance, “pricing is a delicate act in which the benefits of higher revenue per unit are traded off against lower volume that results from higher prices.”(Garrison & Noreen, 2003:805). Thus we can see that the sales volume is quite sensitive to pricing decisions and such sensitivity is called elasticity of demand. This concept measures to which degree are the trade volumes affected by prices and is of great significance in pricing decision. For the electrical goods manufacturing industry, the market demand for our product is very elastic since the technological development is fast and the competition in the market is fierce. If we raise prices, customers will choose other companies, especially...
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