Chapter 8 - Pricing decisions, customer profitability analysis, and activity-based pricing. This chapter presents the following content: Pricing decisions, the profit-maximizing price, the profit-maximizing price, estimating demand, | 1 CHAPTER 8 Pricing Decisions, Customer Profitability Analysis, and Activity-Based Pricing Slide 8-2 2 Pricing Decisions Pricing decisions are often the most difficult decisions that managers face Pricing decisions examined in this chapter include Profit-maximizing price from the standpoint of economic theory Pricing of special orders Marking up costs and target costing Measuring customer profitability and activity based pricing Slide 8-3 3 The Profit-Maximizing Price Economic theory suggests that the quantity demanded is a function of the price that is charged Generally, the higher the price, the lower the quantity demanded If managers can estimate the quantity demanded at various prices, determining the optimal price is straightforward Slide 8-4 Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order. 4 The Profit-Maximizing Price To calculate the profit-maximizing price: Subtract unit . | 1 CHAPTER 8 Pricing Decisions, Customer Profitability Analysis, and Activity-Based Pricing Slide 8-2 2 Pricing Decisions Pricing decisions are often the most difficult decisions that managers face Pricing decisions examined in this chapter include Profit-maximizing price from the standpoint of economic theory Pricing of special orders Marking up costs and target costing Measuring customer profitability and activity based pricing Slide 8-3 3 The Profit-Maximizing Price Economic theory suggests that the quantity demanded is a function of the price that is charged Generally, the higher the price, the lower the quantity demanded If managers can estimate the quantity demanded at various prices, determining the optimal price is straightforward Slide 8-4 Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order. 4 The Profit-Maximizing Price To calculate the profit-maximizing price: Subtract unit variable costs from price to obtain the contribution margin Multiply the contribution margin by the quantity demanded Subtract fixed costs and estimate profits Select the price with the highest profit Slide 8-5 Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order. 5 Estimating the Profit-Maximizing Price Slide 8-6 Learning objective 1: Compute the profit-maximizing price for a product or service, and perform incremental analysis related to pricing a special order. 6 Estimating Demand The most difficult part of determining the profit-maximizing price is determining the demand function A number of approaches can be used Sales managers in various regions could estimate the total quantity demanded at various prices The product could be test marketed with a number of potential customers at various prices Slide 8-7 Learning objective 1: Compute the profit-maximizing price for a product or .
