FINANCIAL AND INVESTMENT ANALYSIS

Financial and Investment analysis



Financial and Investment Analysis

Scenario 1

Importance of costs in the pricing strategy of London Manufacturing

The importance of costs in the pricing strategy is quite high for London Manufacturing Co. The reason is that it is going to help them out in setting up the selling price for their product once they will have the total figure for their costs. There are several pricing strategies that can be used by London Manufacturing Co for their single product or different variety of goods. The three pricing strategies that can be considered by London Manufacturing Co will be discussed in detail.

Cost Base Pricing Strategy

Cost base pricing strategy refers to a technique when a profit margin is added to the cost of the product. There is a particular percentage that is used for the appropriation of the profit margin for the product. Therefore, this is the mechanism for cost base pricing strategy.

Customer Base and Market Base

Customer base pricing strategy refers to the technique in which the psychological aspect of the mind of the customer is assessed before setting the price for the product. There are two main strategies used in the customer base pricing which are penetration and skimming strategy. In penetration, an initial low price is used for the product to capture the market and then the price of the product gradually increases due to the market mechanism. In the case of skimming, a high price is charged from the customers and then the price gradually decreases once the product keeps its position strong in the market.

Market base strategy is completely dependent on the market forces that enable the supplier to charge a particular price for the product. For instance, if the market price of a particular product is $20, so all the suppliers in the industry are going to have the same price because the competition factor can give a tough time to all the stakeholders in the industry. The supplier can either gain a profit or incur a loss under such situations. Therefore, this is the mechanism of market base strategy (Copeland, 2000, 65).

Costing system within LMC

Since London Manufacturing company is involved in the production of goods and then supplying to the whole seller and retailer, the company can adopt the process based accounting system or activity based costing. However, the main focus should be on the first three accounting measured discussed in the above paragraphs. For, LMC, the cost based pricing strategy will be a suitable technique because of the nature of their business (Curtis, 2004, 22).

Improvement needed for the costing system

An improvement that might be required for the costing system is that the recording of the cost figures must take place properly for every product. In this way, the cost based pricing will work very well for London Manufacturing Company. Preparation of Flexible Budget and Calculation of Variance Analysis

Details

Budgeted results (fixed budget)

Actual results

Difference in Variance Amount

Variance (favourable/unfavourable

Sales quantities

240000

240000

 

-

Sales revenue

2800800

$3,000,000

$199,200

Favourable

Material cost

960000

$110,000

($850,000)

Unfavourable

Labour cost

$640,800

$600,000

$40,800

Favourable

Other ...