Pricing

When managers are deciding how to price their products, they have to focus on many important cost and market factors in addition to legal issues that they may encounter. Prices are usually determined by supply and demand that clears the market unchanged by price controls (Cox, 1997). Price controls are set in place by legislation on many products to keep the price from going to high. Management would have to comply to any price controls that are set in place for the specific product that they are offering the market. Competition in the market forms the prices that people are willing to pay for a good or service (Ballve', 1956). If the management knows from their prior research that their product is in abundant supply, they should look to competitors pricing and try to match the ranges that they are pricing, making adjustments based on the quality of the product in comparison. If research suggests the product is scarce and in high demand by the public, pricing should be adjusted higher because of the willingness of the consumer to pay the inflated price. This is why is it thought that the free market is the sovereignty of the consumer (Ballve', 1956).

Price discrimination that offers product at different prices based on the consumer type can also be illegal so management needs to be sure they are pricing in accordance to all of the laws in the area where they are making sales.  Management needs to ensure that they are covering all of the expenses that were incurred during the production of the product including materials, labor, and overhead. Selling products at a loss or at the break-even point will have no benefit to the company.

            Discounted cash flow is a valuation method that analyzes how attractive an investment opportunity is (Investopedia, n.d.). It uses projected future free cash flow and discounts them from the weighted average cost of capital to determine the present value of the investment. If that value is higher than the current cost, it is determined that the investment is undervalued and has the potential to be a good investment. I would disagree with the R&D manager because it is not impossible to use the DCF Method in research and development. You don’t need to measure cost saving; instead, they would forecast future earnings based upon if the research and development project were successful and factor that into the equation (Hindinger, n.d.).

References

Ballve', F. (1956). Essentials of Economics: A Brief Survey of Principles and Policies. Mexico City. Retrieved from http://freedomkeys.com/pricecontrols8.htm

Cox, J. (1997). The Concise Guide to Economics (Second Edition ed.). Savannah-Pikeville Press. Retrieved from http://freedomkeys.com/pricecontrols3.htm

Hindinger, J. (n.d.). eHow Money. Retrieved from How to Use Discounted Cash Flow (DFC) in Research and Development: http://www.ehow.com/how_6576330_use-flow-_dcf_-research-development.html

Investopedia. (n.d.). Investopedia. Retrieved from Discounted Cash Flow-DFC: http://www.investopedia.com/terms/d/dcf.asp#axzz1nmvqV5Cn