Financial Decision Making

This document discusses the importance of choosing the selling price in a business, different pricing techniques such as cost plus pricing and competition based pricing, and the concept of break even analysis. It also provides references for further reading.

FINANCIAL DECISION MAKING
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Question 1
Choosing the selling price is a strategic decision taken by a business. This is because it has
significant implications for the business. Firstly, it determines the profitability of the
business. This is because the profit would be computed by subtracting the cost price from the
selling price. Also, the competitive landscape would also be impacted by the choice of selling
price. This is especially the case when the underlying product is homogeneous is nature. If a
given firm chooses to sell the goods at a lower price than currently prevailing in the market,
then it is highly likely that the other players would also have to lower their prices so as keep
their market share intact (Bhimani et. al., 2016). Additionally, the selling price is imperative
with regards to the customer segment that the firm intends to target. This is because different
customers segments may be defined based on their respective purchasing power. The pricing
decision essentially highlights the customer segment which the company wants to target. For
instance, a car which is priced low would potentially be aimed towards budget or economy
customers while a luxury sports car would be priced to target the high wealth individuals.
Thus, choosing an appropriate price is pivotal for the success of any business. A wrong
choice in this regard may result in lower profits and loss of competitive position in the
marketplace (Parrino and Kidwell, 2014).
Question 2
One of the most popular pricing techniques is cost plus pricing. In this pricing mechanism,
the desired profit is added to the underlying cost of the good so as to arrive at the intended
selling price. As and when there are fluctuations in the cost, price may be revised upwards or
downwards. Another pricing technique is competition based pricing which essentially tends
to focus on offering the product at prices which are currently being charged by the
competitors or prevalent in the market. Thus the profit margins are based on the prevailing
prices in the market. Yet another type of pricing technique is predatory pricing which is
usually adopted by a new incumbent with the intent to disrupt the existing market and
players. In this the price set by the seller is significantly lower than the existing market price.
The price is intentionally set lower so that the other competitors are not able to compete and
hence the new entrant is able to make a mark in the industry by getting customers. Usually
predatory pricing is so low that the new incumbent would make huge losses as the products
are sold below cost (Petty et. al., 2016).
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In order to increase sales, a host of promotional activities may be undertaken. This may
include advertisement based on different media such as television, online, print media. It is
imperative to choose the right advertisement media based on the underlying product. Besides,
free samples of the product may be offered so that the customers try the product which would
potentially generate a positive word of mouth along with ensuring future business. Also, the
company may sponsor various events which can also provide an able platform for marketing
the underlying product or service. Further, endorsement by celebrities and social media
influencers can also serve as a potent means to promote the business goods. Appropriate sales
promotion method would be determined based on type of good, promotion budget, presence
of competition, market size along with current competitive landscape (McLaney and Atrill,
2014).
Question 3
The break even analysis plays a significant role in making decision business and determining
the viability of business operations. Typically, this analysis is presented in a graphical form
where the cost and revenue function is drawn over a range of permissible activity level. There
is some region where the company may make losses while there is a region where profits are
made. The transition from loss to profit or profit to loss would lead to a point where the
company would incur neither profit nor loss. This point is called as the break-even point
(Petty et. al., 2016). This would be the minimum level of sales which the business wishes to
achieve in order to ensure that it can keep business operating. Also, with the change in the
selling price, the break-even point would change. Typically, when selling price increases
without change in any other variable, the profitability improves and hence breakeven is
possible even at lower volumes. However, on the contrary if there is a drop in selling price,
then contribution margin would drop leading to increase in the break-even point. As a result,
the break even graph would also get altered in order to reflect the altered situation (Bhimani
et. al., 2014).
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References
Bhimani, A., Horngren, C.T., Datar, S.M. and Foster, G.(2016), Management and Cost
Accounting, 4th ed. Harlow: Prentice Hall/Financial Times
McLaney, E. and Atrill, P. (2014) Accounting and Finance: An Introduction, 7th ed. Harlow:
Pearson Education Limited
Parrino, R. and Kidwell, D. (2014) ,Fundamentals of Corporate Finance,4th ed., London:
Wiley Publications
Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin J.D. and Burrow, M.(2016),
Financial Management: Principles and Applications 6th ed. Sydney: Pearson Australia
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