Chapter 5Strategic Planning Regarding

Operating Processes

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5-2

What are the Primary Influences on Selling Price?

Customers– Customer perspective of balanced scorecard

Competitors– Learning and growth perspective

Legal and social forces– Learning and growth perspective

Cost– Internal perspective of balanced scorecard

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5-3

How does the External Market Influence Selling

Prices? Pure competition

– Market determines selling price– Individual company is price taker

Monopolistic competition– Market influences selling price– Individual companies influence selling

price through advertising

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5-4

External Market Continued

Oligopoly– Very few companies control selling price– Government monitors selling prices

Monopoly– One company controls market and selling

price– Government approves price changes

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5-5

What is the Difference between Penetration Pricing

and Predatory Pricing? Penetration pricing

– Setting a lower initial selling price to entice customers to try the product/service

– Legal Predatory pricing

– Setting a low initial selling price to drive out the competition

– Illegal

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5-6

What is the Difference between Skimming Pricing

and Price Gouging? Skimming pricing

– Setting higher initial selling prices due to uniqueness of product

– Legal Gouging

– Setting high price due to unusual demand– Illegal

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5-7

What is the Difference between Life-cycle and

Target Pricing? Life-cycle pricing

– Setting a selling price for the life of the product/service based on cost

– Determine cost, determine required markup, set selling price

Target pricing– Setting a selling price for the life of the

product/service based on the market– Determine selling price, determine required

return, set target cost

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5-8

What are the Common Reasons for Holding

Inventory? Meet customer demand Smooth production scheduling Take advantage of quantity discounts Hedge against anticipated cost

increases

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5-9

What are the Common Reasons for Not Holding

Inventory? Significant costs are incurred Holding inventory allows the company

the “hide” its internal process problems because demand can be met from inventory

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5-10

What is the Difference between EOQ and JIT?

EOQ– Short-term model– Minimizes incremental ordering and

holding costs JIT

– Long-term philosophy– Assumes product-sustaining and facility-

sustaining costs are relevant

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5-11

What is the EOQ Model?

Q = 2DO

C

Where,

D = annual demand

O = incremental ordering cost (batch-related)

C = incremental carrying cost (unit-related)

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5-12

How is the JIT Model Different?

Demand-pull system Kanban (visual) system Goals

– Eliminate disruptions in production– Reduce or eliminate nonvalue-added

activities– Minimize inventory levels

Risk: stockouts and resulting customer ill will

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5-13

What are the Common Compensation Plans?

Piece rate– Pay based on units completed

Commission– Pay based on sales

Hourly– Pay based on hours worked

Salary– Pay based on period of time

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5-14

What are Other Compensation Issues?

Bonuses– Additional pay based on some future event

Insurance– Protection for employees

Paid leave– Protection for the company

Gross pay versus net pay– Gross = amount earned– Net = amount received

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5-15

How are Bonuses Calculated?

Bonus amount– Net income before bonus (and taxes)– Net income after bonus (before taxes)– Net income (after bonus and taxes)

Bonus rate– Percentage of bonus amount