Chapter 6 pricing price: In economics and business, the price
(b) Discounts and Allowances
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| (b) Discounts and Allowances
Discounts and allowances result in deduction from the base (or list) price. The deduction may be in the form of a reduced price or some other concession, such as free merchandise or advertising allowance. Discounts and allowances are common place in business dealings. Discounts and allowances can be in the following manners. i) Quantity Discounts Quantity discounts are deductions from a seller's list price intended to encourage customers to buy larger amounts or to buy most of what they need from the seller offering the deduction. Discounts are based on the size of the purchase, either in dollars or in units. A noncumulative discount is based on the size of an individual order of one or more products. A retailer may sell golf balls at $2 each or at three for $5. A manufacturer or wholesaler may set up a quantity discount schedule such as the following, used by a manufacturer of industrial adhesives: Bones Percent discount Purchased in single order from list price 1-5 None 6-12 2.0 13-25 3.5 over 25 5.0 Noncumulative quantity discounts are intended to encourage large orders. A cumulative discount is based on the total volume purchased over a specified period. This type of discount is advantageous to a seller because it ties customers more closely to that firm. The more total business a buyer gives to seller, the greater is discount. IBM offers an assortment of volume-over-time discounts. Cumulative discounts are also common in selling perishable products. These discounts encourage customers to buy fresh suppliers frequently, so that buyer's merchandise will not become stale. ii) Trade Discounts are some times called functional discounts, are reductions from the list price offered to buyers in payment for marketing functions the buyers will perform such as storing, promoting, and selling the product. A manufacturer may quote retail price of $400 with trade discount of 40% and 10% Note that the 40 and 10% discounts do not constitute a total discount of 50 percent off list price. They are not additive; rather, they are discounts on discounts. Each discount is computed on the amount remaining after the preceding discount has been deducted. iii) Cash Discounts A cash discount is a deduction granted to buyers for paying their bills within a specified time. The discount is computed on the net amount due after first deducting trade and quantity discounts from the base price. Every cash discount includes three elements, as The percentage discount The period during which the discount may be taken The time when the bill becomes over due. Cash discount is exhibited in the following fig. 3/10, Net 30 %age to be deducted if still is paid within specified time Number of days from date of invoice in which bill must be paid to receive cash discount Number of days form data of invoice after which bill is overdue 1/7, Net 20 iv) Other Discounts and Allowances A manufacturer of goods such as air conditioners or toys purchased on seasonal basis may consider granting a seasonal discount. Forward dating is a variation on both cash and seasonal discounts. A promotional allowance is a price reduction granted by sellers as payment for promotional services performed. Download 46.43 Kb. Share with your friends:
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