Advanced At one of its regular monthly meetings the board of Giant Steps Ltd was discussing its pricing and output policies. Giant Steps Ltd is a multi-product firm, operating in several distinct but related competitive markets. It aims to maximize profits.

You are required to comment critically and concisely on any four of the following six state¬ ments which were included in the taped record of the meeting:

(a) Profit is maximized by charging the highest possible price.

(b) The product manager’s pricing policy should be to set a price which will maximize demand, by ensuring that contribution per unit is maxi¬ mized.

(c) Allocation of overheads and joint costs enables management to compare performance between products, projects, or divisions.

a review of the empirical studies on pricing deci¬ sions you should read Mills (1988). A more detailed description of target costing can be found in the article by Kato (1993) and the book written by Yoshikawa et al. (1993).

recommend a selling price for a product. Wherever possible, incorporate demand estimates and cost estimates in your answer and indicate that the price that maximizes the short-term profits might not maximize long-term profits. You should be prepared to discuss the limitations of cost-plus pricing and indicate why it is widely used in spite of these limitations.

(d) Allocation of overheads and joint costs is a way of accountants grabbing power and influ¬ ence from marketing and production people.

(e) Our management accounts must be consistent with our published external accounts, so we must follow SSAP 9 on overhead allocation.

(f) Expenditure on Research and Development would be a past or sunk cost, and no matter what decision about output or price was eventually made it would have no bearing on the recovery' of that expenditure. (12 marks)

ICAEW Management Accounting LO1