Paper Topic:
Explain how costs affect pricing decisions.
Explain How Cost Affect Pricing Decisions 2007 Explain How Costs Affect Pricing Decisions Companies ' main objective is to earn profits . To stay in the business a company 's management wants to increase profitability , thus it is important to determine how their decisions will affect profits . Profits depend on several factors , including selling prices , volume , and costs The two basic components that affect product pricing are costs of manufacture and competition in selling (Marketing , 2004 . Pricing decisions must take into consideration various factors such as the production cost , selling or marketing
cost , and administrative cost . In addition , companies must also take into account the selling price other competitors are offering for the same product
A product 's cost can be classified as either fixed or variable according to whether the volume changes (Dominiak Louderback , 1997 . Fixed cost is cost that remains the same in these costs are property taxes , advertising , insurance , and utilities Variable cost on the other hand , are cost that changes in direct proportion to changes in production volume . Examples of variable cost are sales commission , packaging , and shipping costs
Profit planning must take into account expected changes in cost . An increase in cost with no corresponding change in selling price will greatly affect company profits . Inflation is a major cause of changes in both fixed and variable costs . Suppliers might raise their prices owners might raise rents , and salaries might rise . Because of inflation or competition , companies might also change selling prices . Cost is a major factor for pricing decisions . Variances between actual and budgeted cost are inherent in business . Actual cost may not correspond with budgeted cost , thus , it is important to have a thorough planning on how can these cost affect company profit
References
Dominiak , G Louderback , J (1997 . Profit planning . Managerial Accounting , Eight ed (pp . 31-33 . South Western College Publishing
Marketing (2004 . Encarta reference library . Microsoft Corporation
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