MAS - 1306

MANAGEMENT ADVISORY SERVICES

PRICING DECISIONS

Pricing – refers to the determination of the appropriate selling price for a product or service provided
by a firm.

Pricing Responsibility – it is the top management’s responsibility to formulate, or at least approve,

the pricing policies for the firm.

FACTORS INFLUENCING PRICING DECISIONS

INTERNAL FACTORS - includes the type of product or service that the company sells, the
company’s overall objectives and the image that it wants to portray to the public, management
style, among others.

EXTERNAL FACTORS – consists of competitors’ actions, type of industry to which the company
belongs, type of market where the products and services are sold, economic trends, political
situation and governmental influence.

MARKET MODELS AFFECTING PRICING DECISIONS

1. Perfectly competitive market
2. Monopolistic competition
3. Monopoly
4. Oligopoly

SALES PRICE DETERMINATION

SP = C + MU where: SP = Selling Price

C = Cost
MU = Mark-up

PRICE SETTING METHODS

1. COST-BASED PRICING
a. Full Cost Pricing

SP = TC + MU where: SP = Selling Price

or TC = Total cost consisting of
SP = TC + (MU% x TC) materials, labor, factory
overhead, selling and
administrative expenses
MU = Mark-up or target profit
which usually expressed
as a percentage based
on total cost

b. Materials Cost Pricing

SP = M + (MU% x M) + CC + OE

MAS – 1306 : Page 1

 where: M = Materials Cost
MU% = Mark-up percentage
CC = Conversion cost composed of labor and overhead costs
OE = Operating expenses composed of selling and administrative
expenses

c. Conversion Cost Pricing

SP = CC + (MU% x CC) + M + OE

where: M = Materials Cost

MU% = Mark-up percentage
CC = Conversion cost composed of labor and overhead costs
OE = Operating expenses composed of selling and administrative
expenses

d. Variable Cost Pricing

SP = VC + (MU% x VC) where: VC = Variable Cost

MU% = Mark-up Percentage

e. Differential Cost Pricing

2. RETURN ON INVESTMENT (ROI) PRICING

Formula:

TC + (DROR x CE)
SP =
US

or

TC + (DROR x FxCap)
SP = US
1 – (DROR x VCapR)

where: SP = Selling Price

TC = Total or Full cost
DROR = Desired rate of return on investment
CE = Total capital employed or Total investment or Total asset
US = Sales in Units
FxCap = Fixed capital or plant assets or fixed assets used for the
product
VCap = Variable capital ratio or Current assets / Sales

MAS – 1306 : Page 2

3. MARK-UP BASED ON SALES
Formula:

C
SP =
1 – MU%

where: SP = Selling Price

C = Full or Total cost
MU% = Mark-up percentage

4. OTHERS
a. Trade discount consideration

NSP
GSP =
1 – Disc.%

where: GSP = Gross Selling Price

NSP = Net Selling Price
Disc.% = Rate of Discount

b. Sales tax consideration

b.1. Sales Price include Sales tax

GSP
NSP =
1 + TxR

where: GSP = Gross Selling Price

NSP = Net Selling Price
TxR = Sales Tax Rate

b.2. Gross Sales Price does not includes Sales tax

Net selling price (NSP) P xx

Add sales tax (NSP x TxR) xx
Gross Selling Price P xx

c. Loss Leader Pricing

d. Inferior Goods

MAS – 1306 : Page 3

Examples

1. FULL COST PRICING Co. provided the following data:

Manufacturing Costs:
Materials P 10
Labor 4
Factory overhead 8 P22
Selling and administrative 8
Total cost or Full cost per unit P 30

Target profit : 30% of full cost

Required: Compute for the selling price using full cost pricing.

2. MATERIAL COST PRICING Co. provided the following data:

Manufacturing Costs:
Materials P 50
Labor 5
Factory overhead 10 P65
Selling and administrative 5
Total cost per unit P 70

Desired mark-up: 40% of materials cost

Required: Compute for the selling price using material cost pricing.

3. CONVERSION COST PRICING Co. manufactures Product A, one of its product lines. Cost
data are as follows:
Manufacturing Costs:
Materials P 5
Labor 25
Factory overhead 20 P50
Selling and administrative 10
Total cost per unit P 60

Desired mark-up: 40% of conversion cost

Required: Compute for the selling price using conversion cost pricing.

4. VARIABLE COST PRICING Co. produces three products, A, B and C. Cost data for the three
products are as follows:
A B C
Materials P 5 P 6 P 8
Labor 3 2 7
Variable overhead 2 4 5
Variable selling and administrative costs 2 2 2
Total variable cost per unit P 12 P 14 P 22
Fixed manufacturing cost P150,000
Fixed selling and administrative expenses P200,000

MAS – 1306 : Page 4

Required: Compute for the selling price using variable cost pricing.

5. DIFFERENTIAL COST PRICING Co. manufactures a product called Tie-phone which it sells
at a price of P50. Production and selling costs for this product are as follows
Manufacturing Costs:
Materials P 10
Labor 8
Factory overhead 12 P30
Selling and administrative 6
Total cost per unit P 36

At present, the company utilizes 60% of the normal capacity of 20,000 units. To be able to
utilize the idle capacity, it is considering to accept a special order for 5,000 units of the product.
However, the customer is asking for a special price, which naturally should be much lower than
the regular price of P50.

The company does not expect to incur additional selling and administrative costs for this
special order.

Required: What amount of selling price should be charged for this special order?

6. ROI PRICING Co. provided the following:

Total manufacturing cost P200,000

Total selling and administrative expenses 100,000
Full cost or total cost P300,000

The total capital employed is P1,000,000 and the desired rate of return on this investment is
20%. The company expects to sell 50,000 units of product.

Required: Compute for the price using ROI pricing.

ROI PRICING JR. Co. provided the following data:

Variable cost per unit P5

Fixed cost per unit 3
Total or full cost per unit P8

The desired rate of return on total capital employed of P500,000 is 18%. Expected sales
volume in units is 40,000.

Required: Compute for the price using ROI pricing.

ROI PRICING II Company’s normal productive capacity is 100,000 units for which budgeted
fixed manufacturing cost is P200,000. For the coming period, ROI PRICING II is expecting to
produce 120,000 units and sell 110,000 units of product. Cost data about ROI PRICING II’s
product are as follows:

MAS – 1306 : Page 5

 Materials P 3.00
Labor 2.00
Variable overhead 1.50
Variable selling and administrative cost 0.50
Fixed selling and administrative cost per unit 130.00

Total fixed assets or fixed capital employed in the production and sale of this product is
P1,500,000. The expected rate of variable capital to sales is 20%. The company wants to
compute a selling price that will yield a 30% return on capital employed.

Required: Compute for the price using ROI pricing.

7. TRADE DISCOUNT Co. has computed a selling price of P29.10 for its product using full cost
pricing method. The company wants to allow for a 3% discount on sales, and he wants to
include this on the sales price determined.

Required: Compute the gross selling price.

8. SALES TAX Co. is a VAT-registered firm which sells its products at P112 each, inclusive of
the value added tax of 12%.

Required: Compute the net selling price.

9. SALES TAX JR. Co. has established the selling price of its product at P100 exclusive of sales
tax of 12%.

Required: Compute the gross selling price.

MAS – 1306 : Page 6