Question

In 250-500 words Compare short- and long-run pricing decisions and provide examples of each. What are two alternative approaches to long-run pricing decisions?

ORIGINAL ANSWER PLEASE DO NOT COPY AND PASTE FROM OTHER WEBSITES

THANK YOU!

Answer 1

COMPARISON OF SHORT - RUN AND LONG - RUN PRICING DECISIONS

TIME HORIZON OF PRICING DECISIONS

• Short run decisions have a time horizon of less than a year: pricing a one-time - only special order adjusting product mix and output volume.
• Costs are often irrelevant in short run.
• Pricing decisions (fixed costs) are often relevant in the long run.
• Long run decisions involve a time horizon of a year or longer : pricing a product in a major market where price setting has some leeway.
• Profit margins in long run pricing decisions are often set to earn a reasonable return on investment.

EXAMPLE OF COSTING AND PRICING FOR SHORT RUN

• Anil Corporation operates a plant with a monthly capacity of 5,00,000 cases of tomato sauce.
• Anil is presently producing 3,00,000 cases per month.
• Denwar has asked Anil and two other competitors to bid on supplying 1,50,000 cases each month for the next four months.
• Cost Per Case

Variable Manufacturing	$38
Variable Marketing and Distribution	$13
Fixed manufacturing	$14
Fixed Marketing and Distribution	$15
Total	$80

Relevant Costs

Variable Manufacturing 38.00

Fixed Manufacturing 1.10

Total 39.10

• Therfore, $165000/150000 = $1.10
• Any bid above $39.10 will improve Anil's profotability in the short run.
• Suppose that Anil believes that Denwar will sell the tomato sauce in Anil's current markets but at a lower price than Anil.
• Relevant costs of the bidding decision should include revenues lost on sales to existing customers.

EXAMPLE OF COSTING AND PRICING FOR LONG RUN

• Lata Computer Corporation manufactures two brands of computers: Simple Computers (SC) and Complex Computers (CC).
• Lata uses a long run time horizon to price Complex Computers (CC).
• Direct Materials cost vary with the number of units produced.
• Direct Manufacturing Labour Costs vary with direct manufacturing labour hours.
• Ordering and Receiving, testing and inspection, and rework costs vary with their chosen cost drivers.

• Ordering: $ 78 per order

  Testing: $ 2 per inspection hour

  Rework: $ 38 per unit reworked

• Cost Per Unit

  Direct Materials $ 450.00

  Direct Labour:

  3.50 hours @ $19 per hour $ 66.50

  Total $ 516.50

• Number of orders placed: 17,000

  Number of testing hours: 3,000,000

  Number of units reworked: 8,000

• The direct fixed costs of machine used exclusively for the manufacture of Complex Computers (CC) total $ 7,000,000.
• What is the cost of producing 1,00,000 units of Complex Computers?

• Direct material and labour $ 51,650,000

  Direct fixed costs $ 7,000,000

  Ordering (17,000* $78) $ 1,326,000

  Testing (3,000,000 * $2) $ 6,000,000

  Rework (8,000 * $38) $ 304,000

  Total $ 66,280,000

• $66,280,000/100,000 units = $662.80/unit