ACCA_F5_KUPLAN教材_46

15    Price-discrimination pricing strategy


Aprice-discrimination strategy is where a company sells the same products atdifferent prices in different markets.
This is possible if:
§    the seller can determine the selling price
§    customers can be segregated into differentmarkets
§    customers cannot buy at the lower price inone market and sell at the higher price in the other market.
Segmentation willusually be on the basis of one or more the following:
§    time
§    age
§    gender
§    type of service
§    geographical location
§    quantity
§    type of customer.

Illustration 16 – Price discrimination pricingstrategy

Examples of price discrimination include: §    lower admission prices for children atcertain sporting and entertainment events §    discounts for Senior Citizens in some pubsand restaurants §    concessionary rail fares for students §    lower admission prices for females at somenightclubs.

 

Test your understanding 15

1   identifyfour means of segmenting customers in relation to a price discriminationstrategy. 2   Whichservices or products lend themselves to a price-discrimination strategy?

16    Using relevant costs to arrive at a price


The principles ofrelevant costing were met in paper F2. Here relevant costs are used to arriveat a minimum tender price for a one-off tender.
The use of relevantcosts is only suitable for a one-off decision since:
§    Fixed costs may become relevant in the long run
§    There are problems estimating incrementalcash flows
§    There is a conflict between accountingmeasures such as profit and this approach.

Illustration 17 – Using relevant costs to arrive at aprice
Mr. Smith has been asked to quote a price for aspecial contract. He has already prepared his tender but has asked you toreview it for him. He has pointed out to you that he wants to quote theminimum price as he believes this will lead to more lucrative work in thefuture. Mr. Smith’s tender
					$
Material:		A 2,000 kgs @ $10 per kg			20,000
		B 1,000 kgs @ $15 per kg			15,000
		C 500 kgs @ $40 per kg			20,000
		D 50 litres @ $12 per litre			600
Labour:		Skilled 1,000 hrs @ $25 per hr			25,000
		Semi-skilled 2,000 hrs @ $15 per hr			30,000
		Unskilled, 500 hrs @ $10per hr			5,000
Fixed overheads 3,500 hrs @ $12 per hr					42,000
Costs of preparing the tender:
		Mr. Smith’s time			1,000
		Other expenses			500
Minimum profit (5% of total costs)					7,725
Minimum tender price					166,825
Other information   Material A §    1,000 kgs of this material is in stock at acost of $5 per kg. §    Mr. Smith has no alternative use for hismaterial and intends selling it for $2 per kg. §    However, if he sold any he would have topay a fixed sum of $300 to cover delivery costs. §    The current purchases price is $10 per kg.   Material B §    There is plenty of this material in stockat a cost of $18 per kg. §    The current purchases price has fallen to$15 per kg. §    This material is constantly used by Mr.Smith in his business.   Material C §    The total amount in stock of 500 kgs wasbought for $10,000 some time ago for another one-off contract that neverhappened. §    Mr. Smith is considering selling it for $6,000 in total or using it as asubstitute for another material, constantly used in normal production. §    If used in this latter manner it would save$8,000 of the other material. §    Current purchase price is $40 per kg.   Material D §    There are 100 litres of this material instock. §    It is dangerous and if not used in thiscontract will have to be disposed of at a cost to Mr. Smith of $50 per litre. §    The current purchase price is $12 perlitre. §     Skilled labour. §    Mr. Smith only hires skilled labour when heneeds it. §    $25 per hour is the current hourly rate.   Semi-skilled labour. §    Mr. Smith has a workforce of 50semi-skilled labourers who are currently not fully employed. §    They are on annual contracts and the numberof spare hours currently available for this project are 1,500. Any hours inexcess of this will have to be paid for at time-and-a-half. §    The normal hourly rate is $15 per hour.   Unskilled labour. §    These are currently fully employed by Mr.Smith on jobs where they produce a contribution of $2 per unskilled labourhour. §    Their current rate is $10 per hour,although extra could be hired at $20 an hour if necessary. Fixed overheads. §    This is considered by Mr. Smith to be anaccurate estimate of the hourly rate based on his existing production.   Cost of preparing the tender §    Mr. Smith has spent 10 hours working onthis project at $100 per hour, which he believes is his charge-out rate. §    Other expenses include the cost of traveland research spent by Mr. Smith on the project.   Profit. §    This is Mr. Smith’s minimum profit marginwhich he believes is necessary to cover ‘general day-to-day expenses ofrunning a business’.   Required: Calculate and explain for Mr. Smith what you believethe minimum tender price should be.   Solution
						$		$
1	Material A		1,000 kgs @ $2 - $300			1,700
			1,000 kgs @ $10			10,000
								11,700
2	Material B		1,000 kgs @ $15					15,000
3	Material C		500 kgs – opportunity cost					8,000
4	Material D		50 litres @$50					(2,500)
5	Skilled labour		1,000 hrs @ $25					25,000
6	Semi-skilled labour		500 hrs @ $22.50					11,250
7	Unskilled labour		500 @ $ 12 (opportunity cost)					6,000
Minimum tender price								74,450
Notes 1   Presumablythe 1,000 kgs in stock would otherwise be sold at a net gain of $1,700. Thisgain is therefore as a result of using this material in the contract. (Note,however, that the gain forgone is less than the cost of buying the extra1,000.kgs.) 2   Asthis material is constantly needed, the relevant cost is the cost ofreplacing it at the current purchase price. 3   Howwould this material be used if it were not required for the contract? Option 1 –Sell it for $6,000. Option 2 – Useit as a substitute and save $8,000. Option 2 ispreferable. This is therefore the opportunity cost of using it in thecontract. (Also note that this opportunity cost is much less than the cost ofbuying it and is therefore the correct decision.) 4   Thecost of disposing of 50 litres will be saved (@$50/litre, i.e. $2,500). Savingthis cost is a relevant benefit. 5   Theincremental cost paying for the labour needed. 6   Theassumption is that the 1,500 spare hours have already been paid for as theworkforce are on annual contracts. The additional cash flow is therefore theextra 500 hours that are needed at time-and-a-half. 7   Foreach hour diverted from their normal jobs contribution of $2 will beforegone. This together with the cost of paying the workers to do the projectamounts to a relevant cost of @12 per kg. they would not be hired at $20 perhour as this is more expensive.   Alternatively This typicalproblem can be looked at from the point of view of incremental cash flows.
				Cash flow normally	Cash flow with project
				$	$
Revenue per hour				12	-
Labour per hour				(10)	(10)
Contribution				2	(10)
Thereforedifference in cash flow is from positive @2 to negative $10, i.e. a negativecost of @12 per hour.   8   Fixedoverheads can be ignored as they are not incremental. 9   Costsof preparing the tender are all sunk costs and hence must be ignored. 10 Profitelement should be ignored.

 

Test your understanding 16

1    Relevant cost principles require that onlyfuture Incremental … … should be included in thecalculations. These arisefrom the alternative course of action under consideration. 2    Future incremental … … are the differences between theactual … … if the course of action is taken and theactual … … if it is not. 3    Future incremental … … relate to those costs andrevenues which can … … the decision underconsideration or be … … by it. 4    Which of the following are specificallyexcluded from relevant cost calculations: (a)   sunk costs (b)   non-cash flows (e.g. depreciation) (c)   historic costs – (e.g. of an asset) (d)   book values (e.g. inventory values) (e)   unavoidable costs (f)   opportunity costs and revenues (g)   apportioned fixed costs (h)   finance costs (e.g. interest – discountingdeals with this).