(Drury) Pricing Decisions and Profitability Analysis - A price-setting firm facing short-run pricing decisions (covered in )
3 important questions on (Drury) Pricing Decisions and Profitability Analysis - A price-setting firm facing short-run pricing decisions (covered in )
What is meant with a price-setting firm facing short-run pricing decisions?
A one time special order in competition with other suppliers.
Why should bids be made at prices that exceed incremental costs?
Any excess of revenues over incremental costs will provide a contribution to committed fixed costs that would not otherwise have been obtained.
What conditions should a bid for a one-time special order based on covering only short-term incremental costs meet? (3)
1. Sufficient capacity is available for all resources that are required to fulfill the order. If some resources are fully utilized, opportunity costs of the scarce resources must be covered by the bid price.
2. The bid price will not affect the future selling prices and the customer will not expect repeat business to be priced to cover short-term incremental costs.
3. The order will utilize unused capacity for only a short period and capacity will be released for use on more profitable opportunities.
2. The bid price will not affect the future selling prices and the customer will not expect repeat business to be priced to cover short-term incremental costs.
3. The order will utilize unused capacity for only a short period and capacity will be released for use on more profitable opportunities.
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