Page 184 - International Marketing

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186 International Marketing BRILLIANT'S

with the scale of operation such as number of units manufactured. For
example, salaries of the managerial staff, office rent and other office and
factory overhead expenses are fixed costs. On the other hand, variable
costs are those costs that bear a direct relationship to the level of operations.
For example, cost of raw materials, labour used in production.
It is important to measure costs accurately in order to develop a cost
volume relationship and to allocate various costs as fixed and variable.
Cost-based pricing involves computing all relevant costs and then adding
a desired profit markup to arrive at a price. The cost approach is popular
because it is simple to comprehend and use and leads to fairly stable
prices. It has two drawbacks. First, definition and computation of costs
can become troublesome. What proportion of cost should be included as
variable cost and fixed cost. Second, this approach brings an element of
inflexibility into the pricing decision because of the emphasis on cost.
A conservative attitude would favour using full costs as the basis of
pricing. On the other hand, an incremental cost pricing could allow seeking
business otherwise lost. The profit markup applied to the cost to compute
final price may simply be a markup percentage arbitrarily decided upon.
Alternatively, the profit markup may represent a desired percentage return
on investment.

Total invested capital × Percentage
Percentage markup on cost = Standard cost of annual desired return
normal production on investment
This method is an improvement over the pure cost plus method since
markup is derived more scientifically. In this method, markup is linked to
the total investment and therefore does not consider changes in prices of
cost components.
2. Market Based Pricing: According to market based pricing, an
estimate is made of the acceptable price in the target market segment.
The upper limit is set by "what the market can bear". The characteristics,
requirements competitive conditions and the paying capacity of the
various markets differ from each other. It would always be useful to look
at the market to determine the prices to be charged. An attempt should
be made to find out what the market can afford to pay. Having found out
what the market can afford to pay, the firm has to determine whether
it can sell at that price by working back from the market price. The
margins of various middlemen, internal taxes, import duty, transport and
insurance costs when subtracted from the market price would give an
idea of the possible FOB realization for the exporter. The market based
price is determined as under: