What is minimum pricing, Strategic Management

Assignment Help:

Q. What is Minimum pricing?

The minimum transfer price an internal seller would accept will depend on whether it has spare capacity to utilise or not.   

If spare capacity exists the relevant cost and therefore minimum price to a seller would be the variable (marginal) cost of production e.g. extra cost of making and selling one more unit.  Variable (marginal) cost would be the only cost considered by a seller because fixed overhead is normally unavoidable and would not change if supply did or did not take place. The variable (marginal) cost represents the absolute bare minimum transfer price to a seller, in circumstances of spare capacity, at this price, the seller would be indifferent but not out of pocket.  Marginal costing may also be appropriate when no intermediate market exists for the seller e.g.  Seller can only sell to an internal customer and no external customers are available.

If full capacity exists, the seller would have to turn away external customers and business will be lost if further internal supply were to take place.   Because of this dilemma the seller would normally want a minimum price at least equal to the external market price it would normally charge when selling to external customers, this is assuming there is no difference in the cost of supplying internal or external customers e.g. differences in packaging, delivery or marketing costs, in which case the price would normally be adjusted. 

The minimum transfer price for a seller at full capacity is generally the external market price, if for some reason the seller maybe discontinuing other products to supply internally, then the minimum price would be the variable (marginal) cost of production and the lost contribution from discontinuing other products for internal supply to take place e.g. the variable cost and contribution lost being the opportunity cost.


Related Discussions:- What is minimum pricing

Analyse link between corporate strategy and bottom line, Question 1: "S...

Question 1: "Strategic Corporate Social Responsibility executed well is effective Corporate Social Responsibility". What are the essential elements to take into account in o

e-strategy in organisations, 1 - Describe the Benefits of Having an E-Stra...

1 - Describe the Benefits of Having an E-Strategy in Organisations. 2 - Estimate the Contribution of an E-Strategy to the Achievement of an Organisation's Objectives. 3 - Tal

Performance management scenario, You are Pam, Vice President of Marketing f...

You are Pam, Vice President of Marketing for Superior Products, Inc. You joined the company two months ago, replacing an individual who hadbeen the VP of Marketing for the comp

Diffrence between ROCE and RI, Q. Diffrence between ROCE and RI? Both R...

Q. Diffrence between ROCE and RI? Both ROCE and RI are good measures to use when assessing financial performance, since both consider the capital invested, as well as the profi

Marketing strategy for services, Marketing Strategy for Services ...

Marketing Strategy for Services This activity is part of your marketing plan.  Prepare a 4-5 page report, addressing the following : o   Describe the target

ReStrategic, Process design strategy define with example

Process design strategy define with example

Factors about transfer pricing, Q. Factors about transfer pricing? ...

Q. Factors about transfer pricing? Does the supplier have a solid track record for delivery e.g. references from other satisfied customers in terms of the quality of servic

Create a chart that plots profit, Excel is often used to perform "what-if" ...

Excel is often used to perform "what-if" analyses. In these, a model that depends on a number of variables is constructed, and the outcomes predicted by the model are determined fo

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd