Review the following statements and write 3–4 paragraphs that provide support fo

Question

Review the following statements and write 3–4 paragraphs that provide support for your answers:

1.Managers should base pricing decisions on both cost and market factors. In addition, they must also consider legal issues. Describe the influence that the law has on pricing decisions.
2."It is impossible to use Discounted Cash Flow methods for evaluating investments in research and development. There are no cost savings to measure, and we don’t even know what products might come out of our R&D activities." This is a quote from an R&D manager who was asked to justify investment in a major research project based on its expected net present value. How would you respond to this statement? Do you agree or disagree? Explain.


•Compare the points made about the influence of the law on pricing decisions to your own. How were they similar or different?
•Review a peer’s post that was different from your own regarding the use of Discounted Cash Flow methods. Did any of the points he or she made make you reconsider your position as to which costing method would be best?
•If so, what points made you change your mind?
•If not, what additional arguments can you make that would directly refute the points that he or she made.

Explanation / Answer

1.)

Managers should base pricing decisions on both cost and market factors. In addition, they must also consider legal issues. Describe the influence that the law has on pricing decisions.

Pricing is based on many critical factors from process of Marketing, Advertisement and Distribution (MAD). It is calculating according to the contribution of customer required for the product created by firm. Right understanding of customer’ need and desire in potential segment is essential for choosing the item and its rate. Strategic plan for marketing sector along with customer relationship building helps in achieving the financial objective of the company. We can say that pricing decision should be in alignment with maximizing the profit and revenue for long-term by acquiring reasonable share in market.    

The brand of the product is also one of the major parameters in putting the price tag on the product. Rolls Royce is one of the examples in automobile sector for its premium price. But it happens only when the company is able to hold its quality for premium tag in sustainable basis for reasonable time-period.
Sudden demand for certain items also gives good price for short term. It is also known as “Price Skimming”. The objective of organization is to target these customers who are ready to pay higher prices for getting the goods early. But once the demand is saturated, prices will go down to lure other customers who is not willing to pay that much. The advantage of skimming is to gain higher profits by putting the product into premium position for certain market segment which results in faster recovery of costs involved in launching the product and inventory price. The negative side of the skimming is too much dependency on the short-term demand for product which can go otherwise. So it is gamble if market situation is not completely understood.

There is concept of penetration pricing which sets initial lower price to gain a share in market to establish itself. It helps in attracting customer who is loyal to certain brands. The objective of penetration pricing is to increase the sales in market. As gaining profit takes time, it is in contrast to skimming which aims for short term profit. The disadvantage of penetration pricing is ambiguity factors which happen in between the product creation and its launch to market. If company is not able to recover its fixed cost by achieving reasonable share in market, it will not be able to bear the cost of production and distribution.

There are different laws for each state and country to govern the prices of products in market. The attorney is right person to provide the rules and regulations to comply with legal issues. The rules mostly checks the maximum retails price (MRP). In many states, it also controls ceiling on the price.

Reference:

Kotler,P. (2006). Marketing Management. Prentice Hall.

2.)

“It is impossible to use DCF methods for evaluating investments in research and development. There are no cost savings to measure, and we don’t even know what products might come out of our R&D activities.” This is a quote from an R&D manager who was asked to justify investment in a major research project based on its expected net present value. How would you respond to this statement? Do you agree or disagree? Explain.

The Research and Development manager’ decision for evaluating investment in R&D is based on sound assumption. The concept of DCF provides assessment criteria for investment decision in firm expansion, renovation, replacement of existing system, acquisition and R&D program etc.

Discounted cash flow (DCF) relates with current investment which has potential for better returns in long-terms. The time value of money and risk premium is important characteristics of DCF to check whether the investment is worth considering. If there is any delay in payment for shareholder, they are supposed to be compensated by cash. Also, investors have option of extra return in risk premium if cash flow is not materialized.
There is always a chance in R&D programs as there are uncertainty factors regarding the outcome of research. So if product comes out good and saleable, it will compensate for all the investment by providing high patent price, license issuing price to use the product and market price of the product. But research plan should be based on clear and well-defined way to measure the rankings of project which can result in better ROI. Big and early cash flows are preferable to low returns in long term.


Above criteria justifies the decision of Managers in investment based on present evaluation and performance measure.

Reference:

Chadwick, Leslie. (1993). Management Accounting. Routledge.

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