The pricing decision of a firm

The pricing decision of a firm is not an easy task. Major influences on pricing decisions are customer demand, political, legal and image issues, and the price of competitor’s product and the cost of the product manufactured. Prices are determined by the market, subject to costs that must be covered in the long run. Sometimes the companies can encounter situations where they are faced with the opportunity of bidding for a one time special order in competition with other suppliers. Though there can be come adverse effects if the pricing decision is not taken properly.

High-risk strategy reduces profit margins affecting profitability and liquidity. The pricing decisions can lead to price wars i. e. the competitors may react to price cuts to preserve market share. Change in cost of production may result in losses being made due to low Pricing Decisions. Direct Costing Direct costing system only assigns costs to cost objects. They are appropriate for decision-making where the cost of those join resources that fluctuate according to the demand for them are insignificant.

The disadvantage of direct costing system is that systems are not in place to measure and assign indirect cost-to-cost objects. Direct costing system can only be recommended where indirect cost are a low proportion of an organisations total cost. Dangers of focusing excessively on a short run time horizon The problem arising from not taking into account the long-term consequences of accepting business that covers short term incremental costs have been discussed by Kalpan (1990).

He illustrates a situation where a company that makes pens has excess capacity, and a salesperson negotiates an order for 20000 purple pens at a price in excess of the incremental cost. In response to this question “Should the order be excepted? ” According to Kalpan by utilizing the unused capacity to increase the range of products produced, the production process becomes more complex and consequently the fixed cost of managing the additional complexity will eventually increase. In particular, there is a danger that a serried of special orders will be evaluated independently as short-term decisions.

Consequently those resources that cannot be adjusted in the short term will be treated as irrelevant for each decision. The aim of management accounting is to make the best decision for the firm, keeping in mind all the factors whether they are quantitative, financial or judgemental. According to my reading I have analysed that all the factors are important while taking decision, you can’t stress on one but the implication of decisions depends on the circumstances and the situations that a firm is facing.

A good manager will take into consideration all the points and make an appropriate decision. The manager has to keep relevant costs in mind while making a decision. The relevant costs and benefits required for decision-making are only those that will be affected by the decisions. Costs and benefits that are independent of a decision are not considered while making decision. The relevant financial inputs for decision-making purposes are therefore future cash flows, which will differ between the various alternatives being considered.

The need for a short-term decision arises in business because a manager is faced with a problem and alternative courses of action are available. In deciding which option to choose he will need all the information which is relevant to his decision; and he must have some criterion on the basis of which he can choose the best alternative While taking the decision a manager wont consider about the morale of the employees or the effected goodwill of the company, the main thing it will focus on is the increase in profit.