Theory

• Uncertainty

  • Maximin - Best of worst
  • Maximax - Best of best
  • Minimax Regret - smallest regret of best
  • Maximum Regret - minimum of maximum regret
• TARA

  • Transfer - risk shared or transferred with another person or business
  • Avoid - risk should be avoided completely
  • Reduce - risk reduced to an acceptable level
  • Accept - the outcome is more important than the risk
• Costs of quality

  Prevention costs:

  • ensuring that poor quality does not happen e.g. training

  Appraisal costs:

  • the costs of discovering poor quality e.g. quailty inspection department

  Internal failure costs:

  • the costs to the company of internal failures e.g. scrappage of raw materials

  External failure costs:

  • the costs related to failure of product/service outside of company e.g. repair costs
• Penetration Pricing

  • Set low price for new product
  • Aim to win loyalty of market for repeat buying
  • Gain market leadership early on
• Market Skimming

  • High price set initially
  • Price reduced over time to make more accesible to the broader market
  • Easier to reduce prices over time than increse them
• Premium Pricing

  • Pricing above competition
  • Requires strong brand, quality and differentiation
• Price Differentiation

  • Different prices for different segments
  • Time (peak v off peak)
  • Quantity (bulk buying)
  • Customer (OAP, student rates)
• Product Life Cycle

  Introduction

  • Price penetration to gain loyalty
  • Price skimming

  Growth

  • Economies of scale
  • Aim to be market leader
  • Competitors may enter the market

  Maturity

  • Demand growth slows
  • May try to alter the product, re-market or reduce price
  • Profits usually lower than at growth phase

  Decline

  • Saturation point reached
  • Need to decide when to halt production
• TARA

  P: High, I: Low - Reduce
• TARA

  P: High, I: High - Avoid
• TARA

  P: Low, I: Low - Accept
• TARA

  P: Low, I: High - Transfer
• Shadow Price

  Extra cost per unit a business would be willing to pay to get one more unit of raw material.
• Functional Analysis

  • Focuses on the function a product provides to the customer and uses this as a basis for cost management.
  • Applied at the planning or design / redesign stage
  • Involves a working team from different departments to set themselves clear objectives.
• More than one limiting factor - need linear programming, can use graphical or simplex tableau.
• Differential Pricing

  Used where there are different groups of customers with identifiable characteristics that can be matched with different prices.

  For example - children charged different rates for the cinema
• Target Costing

  Concerned with the shaping of production around targeted cost for a product.

  Stages:

  1. Prepare a product specification
  2. Estimate target selling price
  3. Target profit level calculated
  4. Target cost calculated by deducting profit element from target price