Strategic Management Accounting

3595 words 15 pages
TABLE OF CONTENT
Executive Summary …………………………………………………………………...................2 1.0 Introduction …………………………………………………………………………………...3 2.1 Economic Theory ……………………………………………………………………………...3 2.2 Costs …………………………………………………………………………………………...5 2.3 Cost – plus Pricing …………………………………………………………………………….5 2.4 Production Mix Decision …………………………………………………………..................6 2.5 Target Costing …………………………………………………………………………………7
Conclusion …………………………………………………………………………….................8 2.0 The Role of Standard Costing …………………………………………………….................8 3.6 The Role of Variable Analysis ………………………………………………………………...9 3.7 The Values and Limitations of Variance Analysis …………………………………………..10
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This sensitivity of demand to changes in price is referred to as Price Elasticity of Demand. Elastic demand is when a small change in price causes a larger change in demand i.e. price elasticity is more than 1 (refer to appendix A). This means that if there is a fall in Manac’s prices, this would increase demand considerably, which would result in an increase in total revenue, but if they were to increase prices, this would cause a substantial decrease in demand and there would be a fall in total revenue. Elastic demand could exist because there maybe substitutes for the products offered by Manac. On the other hand, when there are no substitutes and customers place high value on the product it is said that demand is inelastic. Inelastic demand is when a small change in price causes a smaller change in demand i.e. price elasticity of demand is less than 1 (refer to appendix A). A fall in the prices will increase demand for the products, but not by a sufficient amount to maintain the previous revenue levels and a rise in price will increase total revenue.
If Manac’s price elasticity is high they will have difficulty in situations where cost inflation is higher than price inflation, because setting prices in line with costs will cause a disproportionately large reduction in demand and total revenues will decline. During inflation times it would be best for Manac to increase prices by a small amount each time, as customers do not appear

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