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What is a primary aim of a Just-in-Time (JIT) system?

  • To rely on traditional stock management
  • To achieve zero inventory (correct)
  • To extend production run times
  • To maintain high levels of inventory

    • Traditional systems aim to reduce inventory levels and optimise production based on actual sales.

    False

    What are the two main components of a JIT system?

    JIT purchasing and JIT production

    In a traditional inventory management system, management tries to avoid running out of inventories of raw materials and __________.

    <p>finished goods</p> Signup and view all the answers

    Which of the following statements best describes an 'efficient' management approach in a traditional system?

    <p>Reducing set-up time and costs through long production runs</p> Signup and view all the answers

    In traditional systems, purchasers generally trust suppliers to deliver the correct quantities and quality.

    <p>False</p> Signup and view all the answers

    What is often checked upon delivery from suppliers in a traditional inventory management system?

    <p>Quantity and quality</p> Signup and view all the answers

    Match the following terms with their descriptions:

    <p>Just-in-Time (JIT) = Aims for zero inventory and perfect quality Traditional system = Produces based on expected demand Inventory management = Deciding what levels of inventory to hold Purchasing management = Deals with immediate suppliers only</p> Signup and view all the answers

    Which of the following is NOT a reason for holding inventories?

    <p>To increase holding costs</p> Signup and view all the answers

    Interest charges are incurred due to holding lower levels of inventory.

    <p>False</p> Signup and view all the answers

    What is the primary objective of inventory control?

    <p>To minimize holding costs, stock out costs, and ordering costs.</p> Signup and view all the answers

    The formula for average inventory is: Average inventory = safety inventory + _____ reorder quantity.

    <p>1/2</p> Signup and view all the answers

    Which of the following represents stockout costs?

    <p>Lost sales contribution</p> Signup and view all the answers

    A higher maximum inventory level is always beneficial to a company.

    <p>False</p> Signup and view all the answers

    What is the reorder level formula?

    <p>Reorder level = maximum usage × maximum lead time.</p> Signup and view all the answers

    If inventories are too high, _____ costs will be incurred unnecessarily.

    <p>holding</p> Signup and view all the answers

    What does a minimum level of inventory represent?

    <p>Warning of dangerously low inventory</p> Signup and view all the answers

    Match the inventory cost with its description:

    <p>Holding Costs = Costs related to storing unsold inventory Ordering Costs = Costs incurred when purchasing inventory Stockout Costs = Costs associated with running out of inventory</p> Signup and view all the answers

    The reorder quantity is determined when inventory levels reach the reorder level.

    <p>True</p> Signup and view all the answers

    What is the maximum lead time in the context of inventory control?

    <p>The time between placing an order and inventory becoming available.</p> Signup and view all the answers

    If average usage is 350 units per day, the reorder level would need to consider the _____ lead time.

    <p>maximum</p> Signup and view all the answers

    What does the formula 'Maximum level = reorder level + reorder quantity - (minimum usage × minimum lead time)' pertain to?

    <p>Calculating the maximum level of inventory</p> Signup and view all the answers

    Which changes in working practices are likely to be necessary? (Select all that apply)

    <p>Increased focus on accurate forecasting of customer demand</p> Signup and view all the answers

    Value is added to a product while it is inspected for quality.

    <p>False</p> Signup and view all the answers

    JIT manufacturing aims to minimize ________ time by synchronizing production with demand.

    <p>stockholding</p> Signup and view all the answers

    What is a primary benefit of Just-in-Time (JIT) manufacturing?

    <p>Elimination of non-value-added costs</p> Signup and view all the answers

    Match the following activities with their classification as value-added or non-value-added:

    <p>Storing materials = Non-value-added Repairing faulty production work = Value-added Painting a car = Value-added Setting up a machine for drilling holes = Value-added</p> Signup and view all the answers

    Which of these costs may increase as a result of smaller batch sizes in JIT manufacturing?

    <p>Opportunity cost of lost production capacity</p> Signup and view all the answers

    JIT can be applied to all types of products without exception.

    <p>False</p> Signup and view all the answers

    What disaster significantly disrupted the automotive supply chain in 1995?

    <p>Kobe earthquake</p> Signup and view all the answers

    Nissan's stockholding of components is as low as ________ minutes.

    <p>10</p> Signup and view all the answers

    Match the effects of adopting JIT with their consequences:

    <p>Enhanced efficiency = Reduction in excess inventory Increased vulnerability = Higher risk of production interruptions Improved supplier relationships = Closer cooperation with suppliers Necessary adjustments = Potential for increased handling and setup costs</p> Signup and view all the answers

    What is a possible drawback of JIT manufacturing?

    <p>It can make the organization vulnerable to supply chain disruptions.</p> Signup and view all the answers

    Just-in-Time manufacturing was first developed by Ford.

    <p>False</p> Signup and view all the answers

    What is one reason that traditional inventory control systems might still be preferred in some situations?

    <p>Predictable demand for non-perishable items</p> Signup and view all the answers

    In JIT, relationships with ________ are crucial for timely production.

    <p>suppliers</p> Signup and view all the answers

    In the automotive industry, how many parts can a single car require?

    <p>20,000</p> Signup and view all the answers

    What is the main objective of Just-in-Time (JIT) systems?

    <p>To produce or procure items as required by customers</p> Signup and view all the answers

    JIT systems operate on a push basis, using stocks as buffers.

    <p>False</p> Signup and view all the answers

    What does JIT management primarily aim to eliminate?

    <p>Non-value adding activities</p> Signup and view all the answers

    In a JIT environment, suppliers are responsible for the quality of goods according to the _______ philosophy.

    <p>right first time</p> Signup and view all the answers

    Match the following elements of JIT management with their descriptions:

    <p>JIT purchasing = Material purchases coincide with usage Pull system (Kanban) = Production is based on actual demand Preventative maintenance = Regular upkeep to prevent machine breakdowns Supplier relationship = Long-term commitment for quality and delivery</p> Signup and view all the answers

    Which of the following is a characteristic of a JIT system?

    <p>Reduced lead times</p> Signup and view all the answers

    A key element of JIT is to keep inventory levels at maximum for operational efficiency.

    <p>False</p> Signup and view all the answers

    What is the purpose of a Kanban in a JIT system?

    <p>To signal production based on demand</p> Signup and view all the answers

    JIT emphasizes _______ involvement in the production process.

    <p>employee</p> Signup and view all the answers

    What is the expected outcome of implementing JIT systems?

    <p>Streamlined production with reduced waste</p> Signup and view all the answers

    In JIT systems, it is essential to conduct extensive quality checks for incoming materials.

    <p>False</p> Signup and view all the answers

    What role does preventive maintenance play in a JIT system?

    <p>It prevents machine breakdowns and production delays</p> Signup and view all the answers

    JIT relies heavily on _______ for coordinating supply chain activities.

    <p>monitoring</p> Signup and view all the answers

    Match the following descriptions with their corresponding JIT principles:

    <p>Quality = Focus on reducing defects Machine cells = Grouping machines by product Uniform loading = Balance production rate with demand Shorter production runs = Producing only when needed</p> Signup and view all the answers

    Which of the following statements about the bin system is true?

    <p>It may lead to excessive or insufficient inventory.</p> Signup and view all the answers

    In the ABC method of stores control, Group A materials are considered inexpensive.

    <p>False</p> Signup and view all the answers

    What is the Pareto principle also known as?

    <p>80/20 distribution</p> Signup and view all the answers

    The ABC method classifies materials into groups A, B, and C based on their __________.

    <p>expense</p> Signup and view all the answers

    Match the following types of pricing with their definitions:

    <p>Full cost-plus pricing = Pricing based on total cost plus a profit margin Marginal cost-plus pricing = Pricing based on marginal cost plus a profit margin Cost-plus pricing = Adding a markup based on estimated costs</p> Signup and view all the answers

    What is a key advantage of the full cost-plus pricing method?

    <p>It is simple and can be easily delegated.</p> Signup and view all the answers

    The mark-up in full cost-plus pricing is fixed and cannot be varied.

    <p>False</p> Signup and view all the answers

    What does the term 'marginal cost' refer to?

    <p>The cost of producing one additional unit of product</p> Signup and view all the answers

    The full cost of a product is $4.70, and it is sold at full cost plus 70%. The selling price is __________.

    <p>$7.99</p> Signup and view all the answers

    Which of the following costs is NOT typically included in full cost-plus pricing?

    <p>Market research costs</p> Signup and view all the answers

    An advantage of marginal cost-plus pricing is that it draws attention to gross profit margins.

    <p>True</p> Signup and view all the answers

    What percentage profit mark-up is desired on the full production cost from product X?

    <p>20%</p> Signup and view all the answers

    The fixed overheads budgeted are $ __________ per month.

    <p>10,000</p> Signup and view all the answers

    Match the type of inventory control with its description:

    <p>Selective Stores Control = Segregating materials based on cost ABC Classification = Classifying materials into A, B, C according to expense Cost-Plus Pricing = Calculating price based on cost and adding a profit margin</p> Signup and view all the answers

    What does EOQ stand for?

    <p>Economic Order Quantity</p> Signup and view all the answers

    The cost of holding inventory increases as the level of inventories decreases.

    <p>False</p> Signup and view all the answers

    What is the formula for calculating EOQ?

    <p>EOQ = sqrt((2 * CO * D) / CH)</p> Signup and view all the answers

    The reorder quantity can include a buffer inventory, indicated as __________.

    <p>safety inventory</p> Signup and view all the answers

    Match the following inventory management terms with their descriptions:

    <p>Economic Order Quantity = The optimal order size that minimizes total inventory costs Order Cycling = Reviewing inventory levels periodically Two-Bin System = A method of controlling inventory with two storage bins Holding Costs = Costs associated with storing unsold goods</p> Signup and view all the answers

    What is the total annual cost of holding inventory for a component if the holding cost is $2 per unit and there is a buffer of 500 components?

    <p>$2000</p> Signup and view all the answers

    In the economic order quantity model, ordering costs decrease as order quantity increases.

    <p>True</p> Signup and view all the answers

    How does the average inventory relate to the reorder quantity if there is no safety inventory?

    <p>Average inventory equals half of the reorder quantity.</p> Signup and view all the answers

    The total annual relevant costs are minimized at an order quantity of __________ units.

    <p>500</p> Signup and view all the answers

    What happens to the holding costs as the average inventory level increases?

    <p>Holding costs increase</p> Signup and view all the answers

    The total cost line in an EOQ graph shows a direct relationship with both holding and ordering costs.

    <p>True</p> Signup and view all the answers

    What is the cost of placing an order in the provided example?

    <p>$32</p> Signup and view all the answers

    What is a major advantage of using a marginal cost-plus pricing approach?

    <p>It is simple and easy to use.</p> Signup and view all the answers

    Match the following components with their respective values as per the worked examples:

    <p>Annual Demand = 25,000 units Holding Cost per Unit = $6.40 Cost of Order = $32 Buffer Inventory = 500 units</p> Signup and view all the answers

    A major drawback of marginal cost-plus pricing is that it adequately considers fixed overheads.

    <p>False</p> Signup and view all the answers

    What happens during the saturation and decline stage of the product lifecycle?

    <p>Demand begins to fall, and products may become loss-makers.</p> Signup and view all the answers

    Which system emphasizes the periodic review of quantities on hand?

    <p>Order cycling method</p> Signup and view all the answers

    What occurs at the point where the holding costs equal ordering costs in an EOQ graph?

    <p>The minimum total cost is found.</p> Signup and view all the answers

    In a perfect competition market, there are many buyers and many sellers dealing in _____ products.

    <p>identical</p> Signup and view all the answers

    The __________ system of inventory control relies on two storage containers for each item.

    <p>two-bin</p> Signup and view all the answers

    Match the market types with their characteristics:

    <p>Perfect competition = Many buyers and sellers with identical products Monopoly = One seller dominating many buyers Oligopoly = Few firms influencing market prices Competitive market = Firms tend to follow price changes of rivals</p> Signup and view all the answers

    How does a company typically respond if a competitor lowers their prices?

    <p>They might maintain prices if only a small market share will be lost.</p> Signup and view all the answers

    The growth stage in the product lifecycle is characterized by declining demand.

    <p>False</p> Signup and view all the answers

    What is a common fixed mark-up percentage used by retailers?

    <p>20% or 33.3%</p> Signup and view all the answers

    The contribution margin affects how much additional revenue contributes to _____ and profit.

    <p>contribution</p> Signup and view all the answers

    Match the pricing approaches with their definitions:

    <p>Cost-plus pricing = Adding a fixed mark-up on costs Market-based pricing = Prices determined by consumer demand Competition-based pricing = Pricing influenced by competitor pricing Dynamic pricing = Prices that change based on demand conditions</p> Signup and view all the answers

    What is one disadvantage of a marginal cost-plus pricing strategy?

    <p>It neglects demand and competitor pricing.</p> Signup and view all the answers

    During the maturity stage, a product may still be modified to sustain demand.

    <p>True</p> Signup and view all the answers

    What is the primary focus of the marginal cost-plus pricing approach?

    <p>Contribution and profit from sales volume.</p> Signup and view all the answers

    In an _____ market, a single seller dominates and has the power to set prices.

    <p>oligopoly</p> Signup and view all the answers

    Which pricing approach bases prices primarily on what consumers demand rather than on costs?

    <p>Market-based pricing</p> Signup and view all the answers

    What is the primary goal of price leadership in an oligopoly?

    <p>To indicate prices to competitors</p> Signup and view all the answers

    Market penetration pricing sets initial prices high to maximize early profits.

    <p>False</p> Signup and view all the answers

    What is the aim of market skimming pricing?

    <p>To gain high unit profits early in the product's life.</p> Signup and view all the answers

    Differential pricing can be based on ________, product version, place, or time.

    <p>market segment</p> Signup and view all the answers

    Match the pricing strategies with their characteristics:

    <p>Market Penetration Pricing = Low initial prices to gain market share Market Skimming Pricing = High initial prices and progressive decreases Differential Pricing = Selling the same product at different prices Price Leadership = Indicating prices to competitors in an oligopoly</p> Signup and view all the answers

    What does price elasticity of demand measure?

    <p>The change in demand following a change in price</p> Signup and view all the answers

    Perfectly elastic demand means that buyers will purchase any quantity at any price.

    <p>False</p> Signup and view all the answers

    In elastic demand situations, what happens to revenue if prices are increased?

    <p>Revenue decreases.</p> Signup and view all the answers

    A company using __________ pricing aims to discourage new competitors by capturing significant market share quickly.

    <p>penetration</p> Signup and view all the answers

    Match the following pricing types with their basic strategy:

    <p>Market Skimming = Charge high prices initially Market Penetration = Set low prices to attract customers Differential Pricing = Different prices based on customer characteristics Price Leadership = Lead price setting in an oligopoly</p> Signup and view all the answers

    Which of the following is a typical example of differential pricing?

    <p>Charging different prices based on seat location in a theater</p> Signup and view all the answers

    Raising prices in inelastic demand conditions can lead to increased revenue.

    <p>True</p> Signup and view all the answers

    What is the significance of understanding price elasticity in pricing decisions?

    <p>It helps management determine how changes in price will affect sales revenue.</p> Signup and view all the answers

    When demand is said to be ________, small price changes will lead to significant changes in quantity demanded.

    <p>elastic</p> Signup and view all the answers

    Match the phase of the product life cycle to its pricing strategy:

    <p>Introduction = Market Skimming Pricing Growth = Market Penetration Pricing Decline = Differential Pricing Maturity = Price Leadership</p> Signup and view all the answers

    What is the main focus of price theory in demand-based pricing?

    <p>Connecting price, quantity demanded, and total revenue</p> Signup and view all the answers

    In situations of very inelastic demand, customers are sensitive to price changes.

    <p>False</p> Signup and view all the answers

    What must be done if the anticipated product cost is above the target cost?

    <p>The product must be modified to reduce production costs.</p> Signup and view all the answers

    The approach that determines what customers are willing to pay for a product before developing it is called __________.

    <p>target costing</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Target costing = Determining the maximum cost based on customer willingness to pay Transfer pricing = The price at which goods are transferred between divisions Price elasticity = The sensitivity of demand to price changes Monopoly = A market structure where a single seller controls the market</p> Signup and view all the answers

    Which one of these factors does NOT contribute to a firm's pricing strategy in cases of inelastic demand?

    <p>Market trends</p> Signup and view all the answers

    Continuous cost reduction is necessary in the target costing approach.

    <p>True</p> Signup and view all the answers

    What do businesses aim to achieve when setting a transfer price?

    <p>Divisional autonomy without harming overall profit maximization.</p> Signup and view all the answers

    A company that does not follow the market on pricing is said to have a __________ position.

    <p>monopoly</p> Signup and view all the answers

    Match the companies to their approach to target costing:

    <p>Toyota = Successfully uses target costing Mercedes Benz = Uses target costing for cost control Ford = Follows traditional costing methods Honda = Incorporates target costing in product design</p> Signup and view all the answers

    What is a consequence of an increase in ticket prices when demand is elastic?

    <p>Total revenues would likely decrease</p> Signup and view all the answers

    The target cost is derived from the selling price minus the desired profit margin.

    <p>True</p> Signup and view all the answers

    List two factors that can influence demand other than price.

    <p>Quality and service.</p> Signup and view all the answers

    The financial strategy that requires product modifications if costs exceed projected amounts is known as __________.

    <p>target costing</p> Signup and view all the answers

    Match the following pricing strategies with their descriptions:

    <p>Cost-plus pricing = Setting prices based on production costs plus a profit margin Dynamic pricing = Adjusting prices based on market demand Freemium pricing = Offering basic services for free while charging for premium features Penetration pricing = Setting a low price to enter a competitive market</p> Signup and view all the answers

    What is the primary purpose of keeping records of inter-divisional services?

    <p>To evaluate the performance of profit centres</p> Signup and view all the answers

    A transfer price is considered revenue for the receiving division.

    <p>False</p> Signup and view all the answers

    Define a profit centre.

    <p>A profit centre is a division or subsidiary responsible for generating profits from its activities.</p> Signup and view all the answers

    The total profit to the company remains unchanged regardless of the ________ charged between profit centres.

    <p>transfer price</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Transfer Price = Revenue for the supplying division Profit Centre = A division responsible for generating profits Cost-plus Pricing = Sales price determined by adding a profit margin to cost Market Pricing = Sales price based on current market rates</p> Signup and view all the answers

    Which pricing method adds a profit margin to either marginal cost or full cost?

    <p>Cost-plus pricing</p> Signup and view all the answers

    Higher transfer prices charged by one profit centre can improve its profitability at the expense of another.

    <p>True</p> Signup and view all the answers

    What issue arises in transfer pricing between profit centres?

    <p>Disagreement on acceptable pricing.</p> Signup and view all the answers

    A profit centres manager typically aims to make a ________ from the transactions they engage in.

    <p>profit</p> Signup and view all the answers

    Which of the following is NOT a critical control level in inventory management?

    <p>Optimum level</p> Signup and view all the answers

    Transfer pricing policies have no impact on managerial decision-making.

    <p>False</p> Signup and view all the answers

    What is the aim of a Just-in-Time (JIT) system?

    <p>To achieve zero inventory and perfect quality.</p> Signup and view all the answers

    The total profit to the company if profit centre B resells the goods for $18,000 and profit centre A charges $12,000 is ________.

    <p>$8,000</p> Signup and view all the answers

    Match the following pricing strategies with their descriptions:

    <p>Full cost-plus pricing = Sales price based on the full cost plus a profit margin Marginal cost-plus pricing = Sales price based on marginal costs plus a profit margin Target costing = Pricing approach based on consumer demand to meet profit targets Order cycling = System for reviewing quantities on hand periodically</p> Signup and view all the answers

    Study Notes

    Just-in-Time (JIT) Systems Overview

    • JIT systems aim for zero inventory and perfect quality, responding directly to customer demand.
    • Key components include JIT purchasing and JIT production, promoting lower investment, space savings, and increased flexibility.

    Traditional Inventory Management Systems

    • Traditional systems rely on estimated production quantities to meet anticipated sales demand.
    • Management typically ensures sufficient inventory of raw materials and finished goods to avoid shortages.
    • Efficient management focuses on minimizing production costs through longer production runs and economic order quantities for bulk purchasing.

    Introduction to JIT

    • JIT is a pull system where production is driven by actual demand, as opposed to a push system that relies on stock buffers.
    • A JIT purchasing system synchronizes material delivery with usage to reduce costs associated with holding inventory.
    • Non-value-adding activities are minimized, aiming to eliminate waste and improve overall production efficiency.

    Essential Elements of JIT

    • Close supplier relationships are vital for quality and timely delivery.
    • Uniform loading and reduction of setup times promote seamless production processes.
    • Preventative maintenance is essential for ensuring operational reliability.
    • Employee involvement and training contribute to a more flexible workforce capable of performing multiple roles.

    Value-Added Activities in JIT

    • Value is only added during active processing of products; activities like storage, inspection, and transport do not add value.
    • Non-value-added activities should be eliminated to enhance efficiency and reduce costs.

    Problems Associated with JIT

    • Predicting demand patterns can be challenging, potentially leading to stockouts.
    • JIT increases vulnerability to supply chain disruptions, demonstrated by events like the Kobe earthquake and the 2011 Japanese tsunami.
    • JIT may not be suitable for all industries, particularly those with complex supply chains or critical inventory needs, such as healthcare.

    Inventory Control Levels

    • Inventory costs include purchase, holding, ordering, and stockout costs; effective management is critical.
    • Holding inventory serves multiple purposes, including meeting demand, providing process buffers, and exploiting bulk discounts.

    Critical Inventory Control Levels

    • Reorder Level: Trigger point for new orders, calculated as maximum usage multiplied by maximum lead time.
    • Minimum Level: Warns of potential stockouts, calculated as reorder level minus average usage during average lead time.
    • Maximum Level: Indicates potentially excessive inventory; calculated using reorder level, reorder quantity, and minimum usage during minimum lead time.

    Economic Order Quantity (EOQ)

    • EOQ minimizes total inventory costs by determining the optimal order quantity.
    • A well-managed EOQ leads to a balance between ordering costs and holding costs, optimizing inventory levels.

    Summary of Inventory Management Techniques

    • Effective inventory management is essential for maintaining a balance between costs, quality, and customer satisfaction.
    • Techniques such as monitoring demand patterns, supplier relationships, and employing modern inventory systems (like JIT) can dramatically affect a company's efficiency and responsiveness to market trends.### Economic Order Quantity (EOQ)
    • EOQ helps determine the optimal order size to minimize total inventory costs.
    • Average inventory is typically half of the reorder quantity unless buffer or safety inventory is maintained.
    • Holding costs rise with inventory levels; smaller orders can reduce these costs.
    • Ordering costs, influenced by order frequency, include various administrative expenses and increase with smaller order quantities.
    • EOQ can be visually represented in tables, graphs, or calculated using a formula.

    EOQ Calculation Examples

    • Type 1: EOQ Table Method

      • Example: Raw material cost is 16perunitwithanannualdemandof25,000units,holdingcostof16 per unit with an annual demand of 25,000 units, holding cost of 16perunitwithanannualdemandof25,000units,holdingcostof6.40, and order cost of $32.
      • EOQ determined as 500 units where total annual relevant costs are minimized.

    • Type 2: EOQ Graph Method

      • Holding costs increase with order quantity, while ordering costs decrease; EOQ is found where both intersect, also at 500 units.

    • Type 3: EOQ Formula

      • Formula: ( EOQ = \sqrt{\frac{2C_0D}{C_H}} ) where:
        • ( C_H ) = holding cost per unit,
        • ( C_0 ) = ordering cost per order,
        • ( D ) = annual demand.

    Other Inventory Control Systems

    • Order Cycling Method

      • Reviews inventory quantities periodically; for low-cost items, may order based on a 90-60-30 day cycle.

    • Two-Bin System

      • Utilizes two storage bins; when one is empty, an order for replenishment is triggered. It is straightforward but may lead to inefficient inventory levels.

    • Classification of Materials (ABC Method)

      • Classifies items as A (expensive), B (medium cost), and C (inexpensive) for tailored inventory control based on cost sensitivity.

    • Pareto Distribution

      • Emphasizes that 80% of value is derived from 20% of items; critical items should be closely monitored.

    Pricing Approaches

    • Cost-Based Approaches

      • Many companies utilize a cost-plus pricing strategy to determine prices, primarily influenced by full costs.

    • Full Cost-Plus Pricing

      • Sets selling price by adding a profit margin to the total cost of the product; considers production, administration, and selling expenses.

    • Drawbacks of Full Cost Approach

      • Fails to factor in demand-driven pricing, potentially leading to misalignment with market conditions.

    • Marginal Cost-Plus Pricing

      • Pricing based on variable costs plus a profit margin; encourages attention to contribution margins and flexibility in response to sales volume changes.

    Market-Based Pricing Strategies

    • Product Life Cycle Stages

      • Introduction, Growth, Maturity, Saturation/Decline; informs pricing policies through each phase of product life.

    • Market Competition Types

      • Perfect Competition: Many sellers and buyers, no influence on prices.
      • Monopoly: One seller dominates pricing.
      • Oligopoly: Few companies influence market prices through competitive reactions.

    • Price Leadership

      • Major firms may establish prices that others follow, promoting stability in oligopolistic markets.

    • Market Penetration Pricing

      • Launches products at low prices to gain market share quickly.

    • Market Skimming Pricing

      • High initial prices to maximize early profits, then gradually reducing prices as the product matures.

    • Differential Pricing

      • A strategy where the same product can be sold at different prices to various customer segments.### Pricing Strategies

    • Prices can be set based on various factors including market segment, product version, geographical location, and time of service.

    • Airlines may charge different fares in different countries, such as Australia and New Zealand.

    • Services like cinemas and hairdressers often provide discounts for seniors and juveniles.

    • Car models frequently offer 'add-on' extras, allowing brands to cater to diverse customer preferences despite higher overall prices.

    • Theatre ticket prices vary by seat location, demonstrating a common form of price discrimination.

    • Railway companies employ price discrimination, charging more during peak times when demand remains high.

    Price Elasticity of Demand

    • Price elasticity of demand (PED) quantifies the change in quantity demanded due to price changes.
    • The formula for PED is the percentage change in sales demand divided by the percentage change in sales price.
    • Demand is elastic when a small price change leads to a significant change in demand (PED > 1).
    • Demand is inelastic when price changes have a minimal effect on demand (PED < 1).
    • Special cases include perfectly inelastic (PED = 0) where demand remains constant regardless of price, and perfectly elastic (PED = ∞) where any price increase drops demand to zero.
    • Understanding elasticity aids management in pricing decisions; inelastic demand suggests prices can be raised without losing revenue, while elastic demand requires careful price adjustments.

    Demand-Based Pricing

    • Price theory links price, quantity demanded, and total revenue, suggesting a profit-maximizing pricing strategy can be derived.
    • Accurate demand estimates across different price levels are crucial for effective pricing strategies.
    • A monopolistic position allows businesses to set prices flexibly rather than following market rates, impacting demand based on price adjustments.

    Target Costing

    • Target costing shifts the traditional cost-price-profit paradigm, focusing on customer willingness to pay rather than production costs.
    • The Japanese automotive industry pioneered this method, emphasizing cost control throughout the product life cycle.
    • A target cost is determined by subtracting the desired profit margin from the price customers are willing to pay. If the expected production cost exceeds this, modifications are required.
    • It emphasizes continuous cost reduction throughout the product’s life to remain competitive.

    Transfer Pricing

    • Transfer prices determine the cost of goods or services transferred between different units within the same company.
    • Setting transfer prices balances divisional autonomy with overall corporate profitability.
    • Transfer pricing must be recorded for effective planning and control, impacting both cost and revenue.
    • Prices can be based on market rates, production costs, or negotiated terms, impacting profit distribution among profit centers.

    Profit Centres and Pricing Disputes

    • Profit centers within organizations must generate profits from their activities, with performance measured by profitability.
    • Managers may face conflicts when setting transfer prices between profit centers; higher prices can improve one center’s profits at a cost to another.
    • Profitability incentives can lead to pricing strategies that may ultimately harm overall corporate profit, as seen in inter-divisional transactions.

    Key Pricing Concepts

    • Just-In-Time (JIT) aims for minimal inventory while maintaining high quality, reducing costs, and enhancing flexibility.
    • Total inventory costs encompass purchase, holding, ordering, and stock-out costs.
    • Economic Order Quantity (EOQ) minimizes total inventory costs and can be calculated using various methods.
    • Cost-plus pricing incorporates all costs of production plus a profit margin, while target costing focuses on consumer demand and price acceptance.
    • Effective transfer pricing encourages divisional performance without harming corporate profit maximization.

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    Description

    This quiz covers the principles and practices of Just-in-Time (JIT) systems, including their impact on inventory management and production processes. Discover how JIT aims for zero inventory, enhances quality, and increases customer satisfaction while reducing investment requirements. Test your understanding of key concepts and practices associated with JIT systems.

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