pricing policies

Question

"Leisure Furniture Ltd produces furniture for hotels and public houses using specific designs prepared by firms of interior design consultants. Business is brisk and the market is highly competitive with a number of rival companies tendering for work. The company’s pricing policy, based on marginal costing (variable costing) techniques, is generating high sales.

The main activity of Home Furniture Ltd is the production of a limited range of standard lounge suites for household use. The company also offers a service constructing furniture to customers’ designs. This work is undertaken to utilise any spare capacity. The main customers of the company are the major chains of furniture retailers. Due to recession, consumer spending on household durables has decreased recently and, as a result, the company is experiencing a significant reduction in orders for its standard lounge suites. The market is unlikely to improve within the next year. The company’s pricing policy is to add a percentage mark-up to total cost. "

by reference to above , I want to understand why different policies may be appropriate in different circumstances ?

Answer 1

Pricing policy varies as assumptions about (1) incremental gross profit to absorb (2) fixed costs and (3) generate target profit change. For example, for no change in fixed costs, the pricing policy would encourage purchases at lower price assuming high retail sales. Pricing policy would keep the same price but service a special bulk order at reduced price if the incremental gross profit increases target profit.