Decision making in business and pricing strategies

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  1. Explain decision making cycle.

Decision making is the main function in management as any wrongdoings will affect the whole performance. The cycle shows the tools needed to operate activities in an organization. These tools needed are planning, organizing, implementing and controlling.

The first stage will be on planning. Usually, before an organisation starts its operation, they will plan future resources and activities to be carried out first. The plan becomes the foundation for the phases that follow. It is an ongoing step and can be highly specialized based on organizational goals, division goals, departmental goals, and team goals. An example of a good plan is having a good aim by using all the resources. After all the plans agreed by the managers, the plans will be developed. It also involves in setting performance expectations and goals for groups and individuals to channel their efforts toward achieving organizational objectives.

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The next stage will be on organizing. It is important as the plans involves more than one person in various divisions and departments. This requires managers to identify different roles and ensure that amount of the employees are correctly assigned to carry out the plan. The authority, work assignation, and directions will also need to be delegated so that the organization can work striving towards the goals set without errors.

The third stage is about implementing. The managers must make sure that the performance result meets the result targeted to be achieved in the plans constructed earlier. This stage has a direct relationship to the quality, time scale, and cost of the activities.

Lastly, the controlling stage. Regular reviews of task outcomes and comparisons between the work completed with the project definition and plan are the important items to monitor. This means that the work needs guidance and control to ensure it stays on track. Quick and suitable actions must be taken if the project does not stay on plan and budget.

  1. Discuss 3 qualitative factors to be considered by the company if they decide to reject the special order.
  1. Cannot secure future customers’ contract order or loyalty.

When the company decided to reject special order, this means that they also reject the customers and makes their trust on the company shattered. From the rejection, the customers may search for another alternative to meet their demand and the company will probably lose its customers. On the upcoming days, the company cannot ensure customers’ behaviour either to make orders from the company again or not.

  1. Can fully utilised current labour capacity on current orders.

Rejecting special orders means that company does not have to assign some current labours to work on the special orders. If they do so, the labours on current orders are not fully utilized and most probably will effect on the current productions. Thus, by rejecting special orders, the company can fully utilised current labour capacity on current orders.

  1. Can meet regular customers’ demand.

Currently, a company works on a project that are made by regular customers and regular demand. If there are special orders, and if the company decide on taking them, the company will probably forgo the current demand or work and focuses on the special orders. If they do this, the current project for regular customers will be obstructed and will not finish at required completion time. On the other hand, the demand of regular customers can be met if they intended to reject the special orders.

  1. Explain the term ‘opportunity cost’ and ‘sunk cost’ in decision making.
  1. Opportunity cost – the benefit that is forgo or the opportunity loss of choosing one alternative instead of another. It is relevant in future decisions because it will differ the choices of decision made.
  1. Sunk cost – historical cost which incurred in past that are not relevant in future decisions because it will not make any difference in the choice of decision made.
  1. Define throughput accounting.
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Throughput accounting is a new principle-based and simplified management accounting approach that proposed as an alternative to traditional cost accounting. It provides managers with decision support information for enterprise profitability improvement. This identifies factors that limit an organization from reaching its goal, and then focuses on simple measures that drive behaviour in key areas towards reaching organizational goals.

  1. State 3 ways to increase profit.
  1. Increase sales without any changes in cost and pricing.
  2. Decrease cost without affecting the assets amount and quality.
  3. Increase sales price without decreasing sales.
  1. Explain with examples the relevance of opportunity costs in decision making.

Opportunity cost is the forgone benefit or the opportunity loss of choosing one alternative instead of another. It is relevant in future decisions because it will differ the choices of decision made.

For example, in a mutual fund investment, if Encik Imran invests RM50,000 in Mutual Fund PQE for one year, then he forgoes the returns that could have been made on that same RM50,000 if it was placed in stock MQE. If returns were expected to be 15 percent on the stock, then he has an opportunity cost of RM7,500. The mutual fund may only expect returns of 10 percent (RM5,000), so the difference between the two is RM2,500. The opportunity cost may also include the peace of mind for Encik Imran having his money invested in a professionally managed fund or the sleep lost after watching his stock fall in the first market correction while the mutual fund's losses were minimal.

  1. Explain the following pricing strategies:
  1. Premium pricing

The practice of setting product price higher than the market price, and expected that customers will purchase it due to the perception that it must have unusually high quality or reputation. In some cases, the product quality is not better, but the company has invested heavily in the marketing needed to give the impression of high quality and promote customers’ loyalty.

  1. Penetration pricing

Penetration pricing is the pricing technique of setting a relatively low entry price, usually lower than the intended established price, to attract new customers, achieve high volume of sales and deep market penetration of a new product. This associated with a marketing objective of increasing market share or sales volume. If the price is set higher, it will result in lower profits than would be the case in short term. However, it will bring benefits to long-term profitability of having a higher market share, so the pricing strategy can often be justified.

  1. Market skimming

Market skimming is the pricing technique of setting a relatively high entry price, usually higher than the intended established price when the demand for it is relatively inelastic. It can be synchronised with high promotional expenditure and the prices can be gradually reduced in the later years. It is used to obtain maximum revenue from the market before substitutes products appear. After that, the price can be reduced drastically to capture the low-end buyers and to stop the imitator competitors.

  1. Differential pricing

It is a technique which also known as multiple pricing that has different prices based on the type of customer, quantity ordered, delivery time, payment terms when the same product is sold in more than one place. This enables companies to profit from their customers' unique valuations. For example, various cinema ticket pricing for various packages of customers.

  1. Loss leaders
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A business offers a product at a price that is not profitable (at below cost price) for the sake of offering another product at a greater profit or to attract new customers, commonly practiced when a business first enters a market in the hope of building a customer base and securing future revenue.