Question

1. Identify whether each of the below is a variable or fixed cost. Justify your answer – (30 pts).

1. Advertisement
2. Delivery and shipping charges
3. Employees’ Salaries
4. Equipment Depreciation
5. Rent payment of the store
6. Sales commission

Fixed costs	Variable costs

2. Referring to figure 1,

a) Explain the difference between cost-based pricing and value-based pricing strategies – (10 pts).

b) Provide an example for each of them – (10 pts).

Cost-based pricing Design a good product Determine product costs Set price based on cost Convince buyers of product's value Value-based pricing Assess customer needs and value perceptions Set target price to match customer perceived value Determine costs that can be incurred Design product to deliver desired value at target price

Figure 1: Value-based pricing versus Cost-based pricing

Strategy	Cost-based pricing	Value-based pricing
Comparison
Example

It was only about 20 years ago that most banks typically only used one distribution channel (their branches). However, since that time they have dramatically expanded the number of channels that they use. Below is a list of common distribution channels for a bank. Your task is to identify the most appropriate mix of channels for two different banks.

The first bank is a major bank that has an extensive number of branches throughout Australia. One of the key aspects of their positioning is that they offer great personal service The second bank is new to Australia. They have no branches and have very little brand awareness in the market. Their plan is to specialize in offering great value home loans only.

Direct channels	Direct channels	Indirect channels
Branches	Mobile managers (who visit the customer)	Enable transactions through third-party retail stores
Phone (a call center)	Personal Banker (staff who directly look after customers)	Utilize mortgage/loan brokers
Phone (an automated system)	Direct mail	Utilize investment advisers/financial planners
Internet banking	Email	Get referrals from real estate agents and accountants
ATM’s	Mobile phone messages	Generate sales/referrals via independent internet sites

QUESTIONS

1. List the 5 most suitable distribution channels for each bank? Justify your answer briefly – (30 pts).
2. Is your selection of channels relatively similar or different between the two banks? Explain why – (20 pts).

Answer 1

a) Advertisement

Advertisement is a Fixed Cost. A fixed cost like advertising can still increase or decrease throughout the year, depending on the season, the weather, the market and demand, or other factors. A company normally set up a fixed Advertisement budget including promotional costs, printing of pamhlets etc.

b) Delivery and Shipping Charges

Shipping or delivery costs are often variable costs directly tied to the volume of sales and production. As the production or sales increases these costs also increase and vice versa is also true.

c) Employees Salaries

It can be both Fixed or Variable Cost. Any employees who work on salary count as a fixed cost. They earn the same amount regardless of how your business is doing. Employees who work per hour, and whose hours change according to business needs, are a variable expense. Wages paid to workers on piece rate basis is variable because it depends upon the number of pieces produced.

d) Equipment Depriciation

Equipment Depreciation is a fixed cost, because it recurs in the same amount per period throughout the useful life of an asset. It cannot be considered as variable cost because it is not dependent on the volume of activity.

e) Rent Payment of the Store

It is a fixed cost because a fixed amount of rent which is determined by the consent of both the parties, is usually paid on monthly basis. The rent for a production facility is a fixed cost if the rent will not change when there are reasonable changes in the amount of output or input.

f) Sales Commission

Salespeople are paid a commission only if they sell products or services, so this is clearly a variable cost. A car salesperson will get commission on the number of cars sold by him. Similarly an insurance agent will get commission on the number of policies sold by him.