PRICING POLICIES 1. Marginal Cost Pricing Case Study Leisure Furniture Inc. leads the market of tailor made furniture for hotel is applying ‘the marginal (variable) cost pricing method to generate higher sales. This method calculates the selling price at slightly above the variable cost of production, which ensures the lowest price available in Maastricht's furniture market. Example: If the variable cost of producing a lounge furniture is €30 000, fixed cost is €4000, the company set a margin factor of 20%, the price would be calculated as: €30 000 + (€30 000 x 20%) = €36000. Advantages ‘* Lower price point increases customer demand and generates high volume of sales, ‘* Suitable for highly competitive market, attracts customers sensitive to prices. * Suitable for mass production (utilizing idle capacity) where the fixed costs have been covered by basic/main production. Disadvantages ‘* Unacceptable for long-term price setting because the omission of fixed costs Which might result in loss. * It ignores market prices, opportunities may be lost by setting a price below the market ‘* Focuses on cost reduction to maintain low prices with less consideration to quality and therefore it will be difficult to move to higher quality market. By this method, the company earns a minimum profit per sale with the risk of loss if market conditions changes (new competitors, inflation). Therefore marginal cost pricing is not recommended for normal/usual pricing activities, but for specific orstrategic activities such as entering new products or discounts on particular orders and should be used cautiously. 2. Mark-Up Pricing ‘At Home Furniture LTD, we use Markup based pricing strategy. This means that we add a specific percentage to the total cost to allow for profit margin and in case of production we add percentage that includes both for profit and non-production cost. Because of low economic activity, consumers spending on household durables has decreased recently and as a result the company is experiencing low demand on orders for the standard lounge suits. Because such pricing method ignores production efficiency, it does not incentivize the company to decrease its prices and adapt to the new market condition and therefore it is failing to increase demand on this product. This pricing method has several advantages and disadvantages Advantages: * Itis easy to implement. © Profit percentage is always built in the markup. ‘© It requires little information; and ‘* Its useful to test the market price demand for newly launched product. Disadvantages: * It ignores efficiencies. ‘* It slightly ignores competition this is due to the percentage of profit margin that is based on the return the company is looking to achieve and not the competitors prices. '* This pricing method is tight. For example, as the percentage of profit margin is based on assumption, in case the company has to react quickly and conduct marketing campaigns, it will be very difficult as the marketing cost might not be builtin the percentage.3. Learning and Conclusions From this case study, we can conclude that the pricing method depends largely on the company's objectives, market condition and the industry in which the business operates. Marginal Pricing will create higher sales volume by setting low prices but in the long-run, it might result in the loss. However, Mark-up Pricing is easy to use in built-in profit, but it ignores efficiencies. 4, Bibliography * (n.d. Accountings Tools. Retrieved from: http://www. intingtools.com/marginal-cost-pricin * (n.d). Accountings Tools. Retrieved from: http://www. accountingtools.com/cost-plus-pricing