Target Price
Global firms adopt different pricing schemes around the world and these results in some practices being viewed as discriminatory. This means that consumers are charged different prices for an identical product without a logical reason for doing so. Price discrimination is legal in the United States as long as price differences can be justified based upon costs. When consumers from two nations are charged different prices, it is discriminatory unless valid reasons can be justified for these practices. Valid reasons include tax, tariffs, transport, or higher manufacturing expenses ( & 2003). However, charging different prices to consumer segments, gouging, and dumping all result in some consumers having to pay more than a fair price for their products ( & 2003). The pricing issues that the company encounters include the kind of changes to be done on the prices; how the change in prices can affect the operation of Wallace and how the old and new clients will react to the changes in the prices. The different pricing issues must be given proper solutions in order for the marketing manager to improve his relationship with the board of directors.
The market pricing approach is used when the environmental improvement under consideration causes an increase or decrease in real outputs and/or inputs. Examples may include a decrease in timber harvest and/or extraction of minerals from a legislative enactment that effectively expands the acreage set aside as a wilderness area; the expected increase in fish harvest due to the implementation of a new water pollution control technology; or an increase in crop yield arising from a legislative mandate of a higher air quality standard. In the above examples, benefits from environmental improvement are identified in terms of changes in outputs or inputs; more specifically, timber, minerals, fish and crops ( 2000). These outputs or inputs are expected to have market prices that accurately reflect their scarcity values or, where this is not the case, shadow prices can be easily imputed. Thus, where environmental improvement is directly associated with changes in the quantity or price of marketed outputs or inputs, the benefit directly attributable to the environmental improvement in question can be measured by changes in the consumers’ and producers’ surpluses ( 2000).
For the established clients, the pricing approach for them should concentrate on providing them the best product for the equivalent amount of price they pay. The company should maintain well made products for appropriate prices. The prices for established clients should not be too high or too low. Rather it should be priced according to the quality of product made for them. The target price for the shoe ranges from to 0 depending on the kind of shoe, style of the shoe and the materials used in making the shoe. The target price of the shoe will depend on the economic situation of the country and the level of demand for the shoes. The shoes will be sold on a limited stock unless there is a high demand for that particular kind of shoes so that costs in making the shoes can be minimized.
Unit cost
Consequently, it is only when unit costs in all firms increase by the same degree that all prices increase pro rata to maintain a constant margin in each firm. Another traditional industrial organization question concerns the relationship between market power and the ability to set prices above unit costs and here the natural question to pose concerns the effect of an increase in one firm’s market share on the price it sets in balanced conditions (1998). Any effect is transmitted via the effect of a redistribution of market shares upon average practice unit costs and the average market price. This is not a simple matter to deal with, for if the share of firm is increased so the share of at least one other firm must be reduced pro rata. To clarify the general case, suppose that the offsetting reduction in shares is born equip proportionately by all other firms. The relationship between a firm’s market share and its price depends on where that firm’s unit costs stand relative to the industry average (1998).If the firm is more efficient than average its price is lower for a higher market share, and conversely if it is less efficient than average. Thus, interdependence of pricing decisions means that there is no simple relation between changes in market shares and the pattern of prices in the industry (1998).
Competitiveness is a chain relationship, and no meaning can be attached to the competitive advantage of any firm without locating its position in the chain. A firm improves its competitiveness by innovating better than its rivals. Either it reduces its unit costs relative to the population average or it enhances its product quality relative to the population average. This is the point: to increase competitive advantage one must improve relative to average behavior. The normal conditions of balanced expansion help to fix the ideas. If costs are reduced, the firm sets a lower normal price but with a higher profit margin so that its fitness is increased. If it improves product quality it can charge a higher market price and gain margin and fitness in that way (1998). The cost of a product influences channel structure directly. Financing the purchase may be a deciding factor in influencing when to buy and what brand to buy. Major equipment products, such as forklifts, are generally sold by exclusive retailers for specific brands or by company branch retailers. Because of the high purchase price, the direct incentives offered by the manufacturer to the user are of considerable importance ( 1992).
In some instances, special options are offered and must be specified to the manufacturer in advance of product delivery. These market characteristics require a short line of communications, no storage or warehousing for wholesale distribution, and frequent involvement by the manufacturer with its retailers ( 1992). The computation for the unit cost is unit cost= total cost/total output. If a company buys shoe parts such as sole which costs .95/piece* 600 pieces=,970, added with heel which costs .95/piece* 600= ,370 and vamp which costs 20.15/piece * 600= ,090. The total cost for making a shoe is ,430 divided by total output which is 600 totals to 34.05. The unit cost for each shoe is .05.
Annual income statement
Income statements are tremendously useful. They’re also tremendously dangerous because they can be misleading. Looking at the company’s income statement, one can think that they have money to spend when they don’t. People can think that everything in their business is healthy when some parts are not healthy at all. The income statement tracks only the promise and agreement part of a company’s transactions. The income statement is an abstraction. It shows the company whether they are making money on the goods or services provided to clients, once the company has taken all their costs and expenses into account (, & 2000). But it isn’t real. It doesn’t show how much cash an individual puts in a bank account or how much cash they spent. In fact, if a certain company is growing fast, they may be building up inventory, buying new machinery, opening up new branches, and in general spending a whole lot more cash than they are generating. Your income statement may show that the company is highly profitable and all the while the company might be running out of cash. There’s another downside to accrual-based income statements (, & 2000).
They provide a huge opportunity for what someone might call creative accounting. Accountants are required to use a code of rules known as Generally Accepted Accounting Principles, or GAAP. The logic behind GAAP is reasonableness; the rules must make sense. Even so, there are many different rules within GAAP for treating depreciation, inventory, and so on. So to a limited extent accountants can choose how they calculate depreciation. They can select one or another method of valuing inventory. They can insert reserves for warranty costs, bad debt, and other eventualities or not. They can record sales differently, depending on the likelihood of returns for credit. All such moves can be perfectly legal and perfectly consistent with accounting standards, but they will make the bottom line of the income statement look very the company is financially sophisticated; they can be fooled by clever accounting. And if they run their own business, what they really want to know isn’t just the bottom line on an income statement but how much cash is actually flowing into the bank account (, & 2000). The next figure will feature the income statement for the shoe company.
Income Statement
For the company LM shoes
August 2006 – August 2007
Income
Sales ,620
Cost of goods sold
Inventory 1,000
Purchases 12,000
Direct Labor 10,000
Net Cost of goods sold ,000
Total Income ,620
Expenses
Salaries $ 8,000
Rent $ 3,000
Supplies $ 6,000
Travel $ 500
Advertising $ 1,000
Utilities $ 700
Total expenses ,200
Profit $ 420
Break Even analysis
Measuring the risk associated with the expected cash flows of the project and incorporating this risk into the determination of the net present value (NPV) is essential for any real world project evaluation. There are various ways in which risk can be incorporated into the NPV computation and capital budgeting decision support. These include the risk-adjusted discount rate, the certainty equivalent, sensitivity and break-even analysis and simulation. The break even analysis determines how low an income variable can fall, or how high a cost variable can rise, before the project breaks even at a net present value of zero (. 2002). For example, management may wish to know how low a product’s price could go in a price war before the project becomes uneconomic. Information about the critical variables allows management to make decisions at two points in time in the investment analysis. During the planning phase, management can commit extra funds to develop more reliable forecasts for variables which will be critical to the venture’s success. Decisions made at this stage are known as before the event decisions. In the operating phase, management can pay special attention to the behavior of identified critical variables so that the project behaves as expected. Decisions made during this phase are known as after the event decisions (. 2002).
Management can use the break-even results in two ways. Initially, management can decide to abandon the project if forecasts show that below break-even values are likely to occur. Later, management can prepare for a worst-case scenario involving the investigated variables being realized during the project’s life. This action could be to suspend production, to try to make production more efficient or to adjust the unit selling price. In using the figures different things should be considered. This includes the variables have been adjusted one at a time. It is unlikely in reality that only one variable will change during the tenor of the project. If decisions are made by observing the behavior of only one variable, then those decisions may be invalid. Variables have been analyzed as if they are independent (. 2002). Pairs of variables such as sales volume/sales price and production volume/production cost are not independent. Breakeven figures are only reliable if it is assumed that the range over which the variables change is sufficiently modest so as not to affect the related variable. Any project ought to be reviewed at regular points during its life. Analyses taken at particular points in time must refer only to future events, and not to past ones (. 2002).
Breakeven values calculated at the outset may not be accurate, and they should be recalculated at the chosen point in time. Break-even analysis is essentially pessimistic. Management should be interested in breakeven figures only as a last line of defense in project analysis (. 2002). The break even point is a certain time wherein the total revenue has an equal value with the total cost. To compute for the break even point the total fixed cost will be divided with the difference between the selling price and the average variable cost. Thus ,000/(0- 35)= .16.
Margin of safety
Marketable securities, accounts receivable, and inventories are continually being converted into cash in the normal course of business. This cash is, in turn, used to pay off maturing current liabilities, reinvested in new inventories, used to finance the growth of new accounts receivable, and, as excess cash balances build up, invested in new marketable securities. Additionally, new short-term liabilities are incurred as sales grow and additional investments in current assets are made ( 1997). Given the various lags in the conversion of inventories to receivables and then to cash, and given the necessity of paying current liabilities when due, normal prudence suggests that a margin of safety of current assets over current liabilities should be maintained. A second margin of safety is dictated by the very nature of current assets. Marketable securities are subject to possible temporary or even permanent declines in market value. Accounts receivable are subject to bad-debt losses. Finally, inventories are subject to physical deterioration, unsaleability, and declines in market value ( 1997).
In order to balance these probable declines in asset values against the fixed requirement to pay one’s debts in full when due, some margin of safety of assets over liabilities is required. The requirements of this margin of safety, coupled with the margin of safety previously discussed, demand that current assets exceed liabilities ( 1997). The margin of safety is acquired by subtracting actual sales level with breakeven sales level. Thus ,620- .16= ,574.83.
Uncertainty analysis
During uncertainty analysis, probabilities are estimated and assigned to possible outcomes of relevant uncertain events. The acquisition of additional information is considered, the expected value of that information and the choice to collect it may be determined, and posterior probabilities may be computed. During uncertainty analysis the informational basis for probability assessment has to be carefully identified, so that it becomes clear whether one may rely on the logical, the frequentistic, or the personalistic interpretation of the probability concept (1993). One method that can be used in the uncertainty analysis is the decision tree. The next figure will feature a decision tree.
In the business the main uncertainty is whether the business will be a success. With the kind of business everything is possible thus decisions should be made with regards to the operations of the business.
References
Credit:ivythesis.typepad.com
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