Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed
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| C HAP TE R 1 2 Pricing, target costing and customer-profitability analysis Teaching tips and points to stress Costing and pricing for the short run Often there is no clear-cut distinction between short-run (SR) and long-run (LR) pricing decisions. The LR is just a series of SRs. Some critics believe that many managers often err by classifying too many decisions at SR. For example, in the SR, accepting a special order for any price above incremental outlay cost will increase profits. Some companies, however, accept a series of special orders that in effect become an LR decision. The text of Chapter 12 uses the phrase ‘one-time-only special order to highlight the limited context in which a focus on only SR incremental costs is appropriate. Students often erroneously assume that VCs are relevant while FCs are irrelevant. However, the text’s ETC example shows that some VCs are irrelevant (marketing, distribution, etc, whereas the special order engenders some incremental batch-level costs that are relevant (material procurement, process changeover, etc. Moreover, some, but not all manufacturing costs are relevant because the special order does not affect regular fixed manufacturing costs. Lowering prices for special orders may adversely affect regular business, unless the market is segmented such that (1) regular customers (or their customers) cannot buy from the special- order customer, (2) the regular customers will not learn about the special order and demand a lower price and (3) the special-order items are marketed as distinct from the regular items to avoid cheapening the image of the latter. In the example, GT appears to be in a different market segment from ETC’s regular customers, so it seems reasonable to expect regular demand to be unaffected by the special order. When calculating relevant costs fora special order, follow the ETC’s example in Chapter 12 and determine how the order will affect indirect costs such as materials procurement and process changeover. Because such costs are not usually traced directly to products, managers may overlook them. These indirect costs can be sizeable and maybe the difference between a profit and a loss on a special order. Download 1.72 Mb. Share with your friends:
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