Question

describe at least two methods used for pricing decisions

Answer 1

There are various strategies that businesses use to set prices for their products or services.Different businesses adopt different pricing strategies
Cost-plus pricing	It is the simplest method of determining the price of a product. Cost of the product is calculated and Certain percentage of profit is added to the cost Cost-plus pricing = Cost + Mark-up
Considering 20% mark up on cost	Per unit
Direct materials	$5.00
Direct labor	$4.00
Variable factory overhead	$3.00
Fixed factory overhead	$6.00
Total Cost	$18.00
Add: Mark up @ 20%	$3.60
Total Cost	$21.60

This method is also known as contribution approach.Fixed costs are not considered while using this method.Only costs that directly change with sales are considered.But fixed cost should be taken into account in determining the profit margin to be added to variable costs to arrive at the selling price
Example:
Direct material		200
Direct labor		300
Fctory Overheads
Fixed	250
Variable	50	300
Total Manufacturing cost		800

In marginal cost plus pricing method as fixed cost is not considered marginal cost of 550 can be used to set the selling price.

Marginal cost plus method is useful at times when the firm has recovered total fixed cost from sales in normal market but is unable to increase its further sales in that market

Penetration pricing and pricing skimming

Penetration pricing/price skimming involves setting low prices with the intention of quickly introducing a new product to the market.The main advantage of price skimming is higher profits in the early stages of the product's life cycle. This is common in technological markets where repeat purchase is uncommon.A business that adopts price skimming limits its sales. Because of high initial price, sales volume is restricted. Also, when the price is dropped later on, customers might not be as excited as when the product was first released.