This project requires a specific research question, a focused literature review that informs the collection of data and analysis and a conclusion that addresses the research question. Most students opt for a project based on segmental pricing and gather price data in their chosen industry, often using the internet.
Segmental pricing is very important for many companies in many sectors. It is particularly important if there are high fixed costs and relatively low variable costs. In these circumstances companies have to generate enough revenue (strictly, contribution) to cover the high fixed costs and make profit. Examples include:
Utilities such as electricity and gas that require huge investment but supplying an extra customer incurs very little direct expense.
The entertainment industry that incurs high fixed costs for sports events, concerts, films, television etc but each extra customer costs very little (so long as capacity is not breached)
Transport where high fixed costs are incurred for infrastructure, buses, trains, aircraft, ships etc. but the cost of carrying an extra passenger is usually small.
Communications where, again, there are high infrastructure costs but the variable cost associated with an incremental customer or more call time is low.
Several streams of literature are relevant to this topic. The economic literature deals with price discrimination, the marketing literature deals with segmentation strategies and there are legal restrictions on segmentation in some countries. The management accounting literature says little (but it should).
This topic area provides scope for data collection because prices can be compared across time and across suppliers; for example: airlines (flight prices available on the web); books (internet versus in-store sales); hotels; mobile phones (various contracts available); utilities (peak versus off-peak, domestic versus industrial users).
Cost-plus versus market-based pricing
The management accounting treatment of pricing tends to focus on a comparison of the accountants practical, cost-plus, approach and the economists theoretically correct, but arguably, impractical approach. There is some theoretical material and a number of surveys that aim to determine whether companies actually use cost-plus methods or, in fact, employ marginal methods without necessarily realising that they do. For someone interested in theoretical issues this area provides scope for analysing whether cost-plus methods are as prevalent as sometimes implied.
This topic also allows students to focus on particular industries if that is their interest. For example, there are specific issues in defence pricing. This has been a long-standing problem because, often, the Ministry of Defence has very limited sources of supply. The MoD does not want to divulge military secrets to foreign companies and this can sometimes mean that few (perhaps one) UK companies can supply what is required. In these circumstances there is a problem establishing a fair price and there is a long history of cost-plus regulated pricing in the UK. The UK experience could provide a topic as could a comparison of UK experience with that of other countries.
Alternatively, students may be interested in the regulation of utilities. The privatisation of the electricity, gas and water industries resulted in monopoly suppliers in some industries and the UK government anticipated this by capping the prices that could be charged.
A study of factors that determine transfer pricing in manufacturing firms:
A case study of MNEs from United Kingdom
In order to achieve business objectives, it is important to undertake and comply with product price planning. In pursuit of price planning, manufacturing firms apply cost-plus and the market-based pricing in making product profitability decisions. This topic is chosen in order to investigate the significant role that pricing strategies play in determining dimensions such as enhanced market share, increased profitability, product quality and desired product image. Several researchers have researched the relevance of pricing for both long-term survival and profitability of entities.
The literature review section of this study will reveal that more recent studies in different fields, such as cost accounting, marketing, and economics – extensively tackle the issue of pricing. The foundation of the current study is that the earnings of organisations can be optimised through proper application of management accounting concepts. To achieve this, suitable management systems should be implemented in order to provide to aid managers in making the most appropriate pricing decisions. According to conventional theory, contribution margin and product cost should be determined by variable costing method, which helps in making profitability judgments. The research method integrates a review of the relevant literature and a field research in UK manufacturing firms, accompanied with critical judgments.
Collins and Parsa (2006) pointed that price is the most important component of marketing mix as it is the one that generates revenue, while all the other component are driven by cost. Shipley (1981) examined British manufacturing companies and found that the objectives of profit and pricing differ gradually and more systematically with size of a firm than with the number of the firm’s competitors. Nonetheless, the evolutionally stage of the market was found to play some part in influencing the price objectives. The aim of this study is to examine how the U.K manufacturing firms apply different pricing strategies in making product profitability decisions.
Many theories have been used to explain the factors that influence multinational transfer pricing, but none of them has been able to comprehensively list the relevant factors. As such, this study will attempt to dig deeper into those factors that managers of MNEs consider when making profitability decisions. Kim and Miller (1979) studied 342 MNEs with the economic units in several developing countries and the parent company in United States. In their findings, they ranked nine factors for the eight countries, whereby an apparent similarity was visible across the countries. They also cited that developing countries make use of a considerable number of exchange controls, repatriation restrictions, and joint venture restrictions, which they maintained is different from the case of developed countries as revealed by previous studies. By researching on a developed country, the current study will investigate if these findings are true.
Burns (1980) surveyed 210 of the Fortune 500 companies and examines 14 variables that relate to transfer prices. She established that the most important determinants include economic conditions in the foreign country, U. S. taxes, reasonable profits for the foreign affiliate, competition in the foreign country, and market conditions in the foreign country. Her conclusion was that transfer-pricing decisions may be largely influenced by external factors; that the power of external pressures is not necessarily linked to an IRS audit; and that common underlying factors influence the transfer-pricing decisions.
She also observes that external pressures seemed to be a function of size and the proportion of exports sent to subsidiaries, and finds that taxes apparently have more influence on companies lacking market-based prices.
Yunker (1983) explains the relative significance of scores of variables and applies correlation analysis to study the relationship between endogenous policy variables, exogenous variables, and the endogenous variables’ “associative” interrelationships. She finds that there are considerable interrelationships among the policy variables. Specifically, MNEs that utilize transfer prices to improve general international profit focus less on profit-oriented measures metrics in the division managers’ performance evaluation. She, however, was not specific in establishing how her observation is used by MNE in making profitability-decisions – the current study will fill this gap.
What factors affect transfer pricing decisions of UK-based MNEs
What are the relationship between pricing methods of MNEs and their profitability performance?
What are the obstacles that MNEs experience in their transfer pricing efforts?
What influence UK MNEs in choice of their transfer pricing?
How does variable costing or contribution margin concepts influence decision-making in manufacturing firms?
What is the plus, in cost-plus pricing?
Noble and Gruca (1999) define pricing strategy as the efforts made to ensure a pricing objective is achieved. The factors that influence managers in making choices of pricing strategies are determined by both internal and external conditions. Collins and Parsa (2006), Ratnatunga (1985), and Avlonitis and Indounas (2005) concur that the approaches to pricing is classified as: (i) competition-based, (ii) cost-based pricing, and (iii) customer value-based pricing. In this study, customer value-based pricing and competition-based pricing will be taken as the marketing approaches to pricing. According to Hinterhuber (2004), the studies associated with market-based pricing are recent and less numerous compared to other classical marketing tools.
In a study of American companies by Noble and Gruca (1999), it was found that most of the companies sampled used cost-based pricing techniques, particularly when estimation of demand became very difficult. These findings are also supported by several other studies. Drury and Tayles (2006) found that cost-plus pricing methods are not associated suggestions of neoclassical economic theory. In view of this, Lucas (1978) judged neoclassical pricing theory with cost plus method, and presented a number of propositions that have been furthered by researchers in alignment with neoclassical theory as well as the counterarguments to this approach.
Hall and Hitch (1939) affirms the overall structures of price setting are cost-based. Bonoma and Clark (1988) established that managers continually employ cost information as the principal issue of pricing. Diamantopoulos (1991) affirms that cost-plus pricing is certainly the most popularly used approach to pricing. Taking into account the marketing point of view,
This study will be based on a mixed method research design. In this regards, qualitative and quantitative data will be collected and used to assess the pricing strategies of different manufacturing firms in the UK. As Davidson ( 2005) explains, quantitative and qualitative techniques presents corresponding aspects of the scientific study method, whereby the quantitative approaches are concerned with testing of hypothesis (primary deduction) while qualitative approaches are concerned with generating of hypothesis (primary induction)…………………………………….
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Read this weeks required article: How Companies Can Get Smart About Raising Prices.In a three- to four-page paper (not including the title and reference pages): Retrieved from the ProQuest database.Explain how to successfully get customers to pay more for your products. Reference the article in support of your response.Explain how a specific pricing strategy will allow you to raise the price on your product successfully.The paperMust be three to four double-spaced pages in length (not including title and references pages) and formatted according to APA style as outlined in the Ashford Writing Center.Must include a separate title page with the following:Title of paperStudents nameCourse name and numberInstructors nameDate submittedMust use at least three scholarly sources from the Ashford University Library, one of which must be peer reviewed, in addition to the textbook.Must document all sources in APA style as outlined in the Ashford Writing Center.
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