ADM 2320 Chapter Notes - Chapter 11: Price Skimming, Price Floor, Price Discrimination

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silvermole552

4 Apr 2016

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Profit orientation: a company objective that can be implemented by focusing on: Target profit pricing: pricing strategy implemented by firms when they have a particular profit goal as their overriding concern. Uses price to stimulate a certain level of sales at a certain profit per unit. Maximizing profits strategy: mathematical model that captures all the factors required to explain and predict sales and profits, which should be able to identify the price at which its profits are maximized. Sales orientation: a company objective based on the belief that increasing sales will help the firm more than will increasing profits. Competitor orientation: company objective based on the premise that the firm should measure itself primarily against the competition. Competitive parity: a firm"s strategy of setting prices that are similar to those of major competitors. Customer orientation: pricing orientation that explicitly invokes the concept of customer value and setting prices to match consumer expectations.

Related Questions

Division Alpha can purchase a required part from an outside supplier at $35. Division Beta will supply the part at a transfer price of $38.50. Division Alpha's manager should

	a.	tell his immediate supervisor that Division Beta is being unreasonable.
	b.	negotiate an appropriate transfer price with the manager of Division Beta.
	c.	pay the $38.50 price to Division Beta.
	d.	buy from the outside supplier.

The state of Illinois has passed a law requiring that every automobile be inspected at least once a year for pollution control. Anfang Enterprises is considering entering into this type of business. After extensive studies, Joseph Anfang has developed the following set of projected annual data on which to make his decision:

Direct service labor	$363,000.00
Variable service overhead costs	270,000.00
Fixed service overhead costs	280,000.00
Marketing expenses	120,000.00
General and administrative expenses	170,000.00
Minimum profit	90,000.00
Cost of assets employed	500,000.00

Anfang believes that his company will inspect 100,000 automobiles per year. The company earns an average of 18.75 percent return on its assets.

The price to be charged for inspecting each automobile using the time and materials pricing method would be calculated as follows:

	a.	($913,000.00 Ã· 100,000) + {($913,000.00 Ã· 100,000) Â´ [($90,000 + $290,000) Ã· $913,000.00]}
	b.	($1,203,000.00 Ã· 100,000) + [($1,203,000.00 Ã· 100,000) Â´ ($90,000 Ã· $1,203,000.00)]
	c.	($1,203,000.00 Ã· 100,000) + [($500,000 Ã· 100,000) Â´ 0.1875]
	d.	None of these

An example of a pricing objective is to

	a.	maintain a minimum rate of return.
	b.	increase market share irrespective of the cost of a product.
	c.	ignore long-term pricing strategies in favor of short-term profits.
	d.	maintain a price that is always under that of the competition.

Development of a transfer price involves

	a.	direct upper management intervention if different transfer prices are determined by the selling division and the buying division.
	b.	including only costs allocated from corporate levels when determining semi-finished product line costs.
	c.	heavy reliance on industry averages.
	d.	applying a target profit rate to the unit cost for the semi-finished product.

Which of the following is not one of the three commonly used methods for determining transfer prices?

	a.	Negotiated
	b.	Cost-plus
	c.	Market-based
	d.	Dictated

The primary difference between a cost-based transfer price and a market-based transfer price is

	a.	the influence of an external source for the raw material or part.
	b.	that the cost-based price will always be more advantageous to the company's overall profit.
	c.	that the market-based price is usually lower.
	d.	the appropriate profit factor.

A pricing method based on product cost is

	a.	cost of goods sold pricing.
	b.	gross margin pricing.
	c.	inventory pricing.
	d.	net income pricing.

Direct service labor	$363,000.00
Variable service overhead costs	270,000.00
Fixed service overhead costs	280,000.00
Marketing expenses	120,000.00
General and administrative expenses	170,000.00
Minimum profit	90,000.00
Cost of assets employed	500,000.00

Anfang believes that his company will inspect 100,000 automobiles per year. The company earns an average of 18.75 percent return on its assets.

The price to be charged for inspecting each automobile using the gross margin pricing method would be calculated as follows:

	a.	($1,203,000.00 Ã· 100,000) + [($1,203,000.00 Ã· 100,000) Â´ ($90,000 Ã· $1,203,000.00)]
	b.	($1,203,000.00 Ã· 100,000) + [($500,000 Ã· 100,000) Â´ 0.1875]
	c.	($913,000.00 Ã· 100,000) + {($913,000.00 Ã· 100,000) Â´ [($90,000 + $290,000) Ã· $913,000.00]}
	d.	None of these

Direct service labor	$363,000.00
Variable service overhead costs	270,000.00
Fixed service overhead costs	280,000.00
Marketing expenses	120,000.00
General and administrative expenses	170,000.00
Minimum profit	90,000.00
Cost of assets employed	500,000.00

Anfang believes that his company will inspect 100,000 automobiles per year. The company earns an average of 18.75 percent return on its assets.

The price to be charged for inspecting each automobile using the return on assets pricing method would be calculated as follows:

	a.	($913,000.00 Ã· 100,000) + {($913,000.00 Ã· 100,000) Â´ [($90,000 + $290,000) Ã· $913,000.00]}
	b.	($1,203,000.00 Ã· 100,000) + [($1,203,000.00 Ã· 100,000) Â´ ($90,000 Ã· $1,203,000.00)]
	c.	($1,203,000.00 Ã· 100,000) + [($500,000 Ã· 100,000) Â´ 0.1875]
	d.	None of these

A common problem associated with transfer pricing occurs when

	a.	managers do not agree with the transfer prices of the inputs provided to them or of the outputs of their own division.
	b.	the gross margin pricing method is used to compute the price.
	c.	a division sells its excess output to an external customer.
	d.	a division purchases inputs for processing from an outside source at a price higher than the internal transfer price.

Transfer pricing

	a.	incorporates procedures that allow for ease in determining the amount of profit associated with each division of a decentralized company.
	b.	is a concept readily accepted by managers of divisions, because it relies on concepts used in cost-based pricing methods.
	c.	involves determining the cost and profit if the output of one division is transferred to another division of the same company.
	d.	is not used by many companies because it is difficult to eliminate intercompany profits.

yellowmosquito685

Subaru's Sales Boom Thanks to the Weaker Yen For the Japanese carmaker Subaru, a sharp fall in the value of yen against the U.S. dollar has turned a problem the lack of U.S. production into an unexpected sales boom. Subaru, which is a niche player in the global auto industry, has long bucked the trend among its Japanese rivals of establishing significant manufacturing facilities in the North American market. Instead, the company has chosen to concentrate most of its manufacturing in Japan in order to achieve economies of scale at its home plants, exporting its production to the United States. Subaru still makes 80 percent of its vehicles at home, compared with 21 percent for Honda. Back in 2012, this strategy was viewed as something of a liability. In those days, one U.S. dollar bought only 80 Japanese yen. The strong yen meant that Subaru cars were being priced out of the U.S. market. Japanese companies like Honda and Toyota, which had substantial production in the United States, gained business at Subaru's expense. But from 2012 onward, with Japan mired in recession and consumer prices falling, the country's central bank repeatedly cut interest rates in an attempt to stimulate the economy. As interest rates fell in Japan, investors moved money out of the country, selling yen and buying the U.S. dollar. They used those dollars to invest in U.S. stocks and bonds where they anticipated a greater return. As a consequence, the price of yen in terms of dollars fell. By December 2015, one dollar bought 120 yen, representing a 50 percent fall in the value of the yen against the U.S. dollar since 2012. For Subaru, the depreciation in the value of the yen has given it a pricing advantage and driven a sales boom. Demand for Subaru cars in the United States has been so strong that the automaker has been struggling to keep up. The profits of Subaru's parent company, Fuji Heavy Industries, have surged. In February 2015, Fuji announced that it would earn record operating profits of around Â¥410 billion ($3.5 billion) for the financial year ending March 2015. Subaru's profit margin has increased to 14.4 percent, compared with 5.6 percent for Honda, a company that is heavily dependent on U.S. production. The good times continued in 2015, with Subaru posting record profits in the quarter ending December 31, 2015. Despite its current pricing advantage, Subaru is moving to increase its U.S. production. It plans to expand its sole plant in the United States, in Indiana, by March 2017, with a goal of making 310,000 a year, up from 200,000 currently. When asked why it is doing this, Subaru's management notes that the yen will not stay weak against the dollar forever, and it is wise to expand local production as a hedge against future increases in the value of the yen. Indeed, when the Bank of Japan decided to set a key interest rate below zero in early February 2016, the yen started to appreciate against the U.S. dollar, presumably on expectations that negative interest rates would finally help stimulate Japan's sluggish economy. By late March 2016, the yen had appreciated against the dollar and was trading at $1=112 yen. Sources: Chang-Ran Kim,Subaru-Maker, Fuji Heavy Lifts Profit View on Rosy US Sales, Weak Yen Reuters, February 3, 2015; Yoko Kubota, Why Subaru's Profit Is Surging, The Wall Street Journal, November 14, 2014; Doron Levin, Subaru Profit Soaring on Weaker Yen, Market Watch, November 15, 2014; Y. Kubato, Weaker Yen Drives Subaru Makers Profit Higher, The Wall Street Journal, February 4, 2016. Page 294

Case Discussion Questions:

Why do you think that historically, Subaru chose to export production from Japan, rather than set up manufacturing facilities in the United States like its Japanese rivals?

What are the currency risks associated with Subaru's export strategy?

What are the potential benefits? Why did Subaru's sales and profits surge in 2014 and 2015? Is Subaru wise to expand its U.S. production capacity?

What other strategies could the company use to hedge against adverse changes in exchange rates? What are the pros and cons of the different hedging strategies Subaru might adopt?

ambermoose899

Read the Background Information about FirstRate Company, below. Then, explain what the companyâs treasurer should do about the draft versions of the projected financial statements and short-term cash flow forecast (prepared by him) in response to comments made by the companyâs chief financial officer (CFO) in their meeting. Do not recommend specific treasury management steps, such as selling investment securities, factoring accounts receivable, reducing operating costs, or seeking alternative financing arrangements. (The background information is not sufficient to formulate such steps, nor is there enough time to implement such steps before the CFO meets with FirstRateâs banks to discuss the financial projections and cash flow forecast). It is most important that you clearly provide the reasons for your recommendations. Background Information about FirstRate Company For nearly two decades, FirstRate has been the second largest firm in its industry, maintaining market share approaching 25 percent and generating stable, if modest, sales and net income growth. Beginning in 20X1, FirstRate began to experience intensified competition from several recent entrants into its industry, including a well-capitalized firm that expanded into FirstRateâs industry by exploiting a distribution channel it developed over many years in its original line of business. FirstRate responded to this increased crowding by "competing on price." In contrast, under its historical strategy, the company positioned itself based on brand recognition, product leadership, and personalized customer service. Along with its revised pricing strategy, FirstRate liberalized its customer credit and product return policies. In response to the effects of its revised pricing strategy on the companyâs operating performance, management immediately scaled back the companyâs product development plans, but was initially slow to critically re-examine its cost structure. FirstRate eventually reduced staff and closed some facilities as it outsourced certain production and fulfillment activities. However, the transitional costs of implementing these changes were significant. In addition, to support its revised pricing strategy, the company expanded its advertising and promotion. While FirstRateâs new strategy yielded greater-than-historical sales growth for the company, its reported net income suffered, along with its stock price. In response to the effects of these changes on FirstRateâs financial performance and condition, its lending banks increased the collateral requirements and interest rates on their loans to the company. The CFO of FirstRate Company is preparing for a meeting at one of the banks where the company been a long-time borrower. The companyâs $40 million working capital line of credit (LOC) will expire shortly. The company currently has $33.5 million in borrowings outstanding under the LOC and this balance will become due and payable in 30 days, unless the bank renews the LOC. The companyâs treasurer has just completed projected financial statements and a short-term cash flow forecast for the company. In anticipation of her bank meeting, the CFO met with the treasurer to discuss the financial projection and forecast. The CFO expressed her concern that "these will fail to make a favorable impression" on the bank. She continued, "Our recent results have already brought pressure from all of our banks. Itâs important that we have the banks in our corner while we implement our revised strategy." The treasurer responded, "Iâve prepared these [projections and forecasts] using our "best case" assumptions and estimates." The CFO replied cryptically, "Well, âsharpen your pencilâ because these are probably not going to get the job done." As the treasurer left her office, the CFO reminded him that, "We have more than a thousand employees, even more stockholders, not to mention dozens of suppliers, and our customers to take care of."

copperfrog8

ADM 2320 Chapter Notes - Chapter 11: Price Skimming, Price Floor, Price Discrimination

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