Overview

You may think that deciding the selling price for products is a function of the marketing department, and indeed the prime responsibility does lie with them. However, the marketing department does not make the decision in isolation.

The pricing decision is a complex mixture of strategic thought, operational planning, marketing and economic decision making by the supplier of the goods or service.

Broadbent and Cullen

(2003)

One of the basic questions to be asked about any product is, Are we making aprofit on this product line? Whilst companies have loss-leaders to attract custom, this can only ever be in exceptional circumstances if the business is to survive.

To maintain its profitability, an organisation needs to understand and take accountof its costs when it makes pricing decisions. In this theme, you look at two techniques for allocating costs to products: full costing and marginal costing.

In this theme you will:

• Learn how to make informed pricing decisions through using the full costing technique

• Practise preparing an estimate of costs using the full costing method and calculating a price

• Find out about marginal costing and identify situations where this is a useful technique.

Pricing Products

To know whether we are making a profit on an existing product or service we must know both:

• the price of the product this should be readily available

• the cost of making that product or providing that service.

Providing information on cost is the central contribution financial managers make to decisions on product...