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

Successful business teams, 1 Explain the characteristics of successful busi...

1 Explain the characteristics of successful business teams 2 Explain the importance of team roles in successful business teams 3 Examine the value of using theoretical models whe

Industry Profitability, How do the five competitive forces in Porter''s mod...

How do the five competitive forces in Porter''s model affect the profitability of the overall industry? For example, in what way might weak forces increase industry profits, and in

Explain about residual income, Q. Explain about Residual income? Residu...

Q. Explain about Residual income? Residual income is profit earned by a division less a "notional interest charge" for investment of finance within it.

Capital requirements directive, A squeeze on credit fall in house prices an...

A squeeze on credit fall in house prices and tumbling stock markets are all reinforcing a slump in consumer confidence, consumption and investment in the EU FS sector. In order to

Describes a business model , Product flows,  information flows, service flo...

Product flows,  information flows, service flows participants' roles

Maintaining the strategic plan, A good strategic plan is a dominant motivat...

A good strategic plan is a dominant motivator for change and usual progress updates are crucial to maintain that momentum. The next steps then are to regularly ensure in on progres

Identify and evaluate a suitable business case , Tasks: With your chos...

Tasks: With your chosen scenario: o   Briefly describe the initial structure - set baseline o   Create a strategic project plan with: A strategic project analysis

Organisation strategic - human resources, Experienced staff of the organisa...

Experienced staff of the organisation contributes in the business expansion of the company. Additionally, the company also provides intensive immersion program for its frontline cr

Illustrations of internal failure cost, Illustrations of internal failure c...

Illustrations of internal failure cost The internal perspective may control performance by assessment of internal quality failure.  Costs incurred before customer has received

Strategy, Strategy formulation presupposes a set of goals and objectives. W...

Strategy formulation presupposes a set of goals and objectives. Why aren’t goals and objectives obvious? What characteristics of people and organizations can make setting goals and

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