Chapter 8

Pricing Decisions, Customer Profitability Analysis, and Activity-Based Pricing

Learning Objectives

  1. Compute the profit-maximizing price for a product or service.
  2. Perform incremental analysis related to pricing a special order.
  3. Explain the cost-plus approach to pricing and why it is inherently circular for manufacturing firms.
  4. Explain the target costing process for a new product.
  5. Analyze customer profitability.
  6. Explain the activity-based pricing approach.


Nancy Sanchez, vice president of marketing for Priced Right Office Supplies, recently attended a management training seminar where the instructor made the following point:

All customers are not the same—some are highly profitable and some are marginally profitable at best. To be successful, companies need to analyze the profitability of customers. Marginally profitable customers should be charged increased prices or their business should be dropped. The highly profitable customers—those are the ones you want to focus on. Direct your marketing campaigns toward them and you'll be on your way to achieving major increases in shareholder value!

Driving home from the seminar, Nancy thought about what she had learned and changes that needed to be made at Priced Right. In particular, she thought about her company's approach ...

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