A 60-inch, high-definition, big screen television creates an aura of intense realism for sports aficionados as they watch with unparalleled clarity the fuzz on the tennis ball as it barely catches the line during a night match at the U.S Open or the insignia on the football as Tom Brady throws yet another spiral touchdown pass. Using a combination of effective cost plus pricing and marketplace knowledge, Little Guys Home Electronics has, for year, helped to bring such exciting sporting events to life for its thousands of customers. Correct pricing decisions are crucial in the home entertainment market, where the profit margin on video products is only 2 to 3%.
Little Guys sets prices by marking up full costs and ensuring that the final price falls within a range between the suggested retail price and the minimum advertised price, both of which are affected by the manufacturer and the marketplace. Its managerial accountants must understand costs behavior to be able to predict costs accurately in order for effective markup and pricing decisions to be made. What types of costs does Little Guys consider in its markups? Several examples include product purchases and shipping costs, warehousing cots, labor (including employee health care and retirement benefits as well as other labor support costs), store insurance, advertising, delivery truck investments and maintenance, and customer service trips. Also, future demand must be estimated so that Little Guys can figure out how much to charge for each television, receiver, and the like, such that all costs across the value chain are covered and the desired profit is achieved. Armed with an effective pricing strategy involving judgment about costs markup percentages, and future market trends, Little Guys hopes to continue delivering exciting home electronics products and services to Chicago-area families for years to come.