Managerial Accounting: Cost and Market factors
As pricing decisions are being made, especially by managers, they should be based on cost as well as market factors. Using cost as a basis for pricing decisions ensures that the sale of the item brings in more returns than the cost of its purchase. This way the business can meet its operational objectives and still balance its cash flow by making more profits than losses. As for market factors, their consideration is so that pricing is made according to the market at that time. In that, if the price of an item has inflated, the selling price will have to be increased as well so that its sale can counter the buying price and still bring in profit to the business.
The law also has great influence on pricing decisions since it is the government that sets and in turn enforces taxation through its courts. This means that if a government places a large amount of tax to be charged on an item, a manager is obliged to consider that charge during the pricing decision of that item. This guarantees the manager that all the costs incurred during its purchase are covered up after its sale. In cases of people buying products in bulk and at higher prices, the taxes are usually assumed to be part of the price at which they are buying. In turn, they sell the product at a lower price to ensure regular continuity of their sales and it is the consumer who eventually pays the larger amount of the products’ tax.
Discounted Cash flow methods are valuation methods that are used in a business to estimate the effectiveness of an opportunity for an investment. It makes use of future cash flow projections which it discounts in order to arrive to a present value which is then used to make an evaluation of the potential involved in making the investment. If the result value is higher than the current cost of the considered investment, then the opportunity is perceived as a good one. Therefore in disagreement, it is possible as well as efficient to use Discounted Cash Flow methods to make evaluations of various investments in research and development.
Kruschwitz, L., & Loeffler, A. (2005). Discounted Cash Flow: A Theory of the Valuation of
Smith, T. J. (2011). Pricing Strategy: Setting Price Levels, Managing Price Discounts and
Establishing Price Structures. South-Western College Pub.