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

A prolific author, Dr. Allen Roth, a prolific author, is considering initia...

Dr. Allen Roth, a prolific author, is considering initiallising her own publishing company.  He will call it STC Publishing, Inc.  STC estimated costs are: Fixed Cost    =    $25,0

Advantages of divisional structures, Advantages of divisional structures ...

Advantages of divisional structures - Quicker decision making e.g. autonomous divisions do not have the long-winded process of a long chain of command when making competitive d

Open communication , 1. Encourage open communication among team members to ...

1. Encourage open communication among team members to support team development 2. Demonstrate ways of resolving conflict among team members

Market based approaches, Q. Market based approaches? Cost based approac...

Q. Market based approaches? Cost based approaches to transfer pricing can ignore what external competition would charge, therefore 'open (external) market price' could be used

Linking strategic organizational, Linking Strategic Organizational Initiati...

Linking Strategic Organizational Initiatives to Purpose, Mission, and Vision Select an existing business that is entering into a new or emerging market for that company. You may

Nano Manufacturing, I need a project and summary of Nano Manufacturing pape...

I need a project and summary of Nano Manufacturing papers, please let me know how much cost it is? i need paper for my final year exam. I would like to finish my Nano Manufacturing

Dominant strategy combination, Janet decides to play a game with her childr...

Janet decides to play a game with her children, Jay and Jill (who are fraternal twins) and Mo. Each child is in their own room and cannot communicate with each other. Suppose Jill

What are the causes of equipment failures, Question 1: (a) What is vi...

Question 1: (a) What is vibration monitoring? Explain, with examples, how can it be useful in industries. (b) Briefly, explain the sources of contaminants which are comm

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