Business Studies (319) - April' 2017 | NIOS SENIOR SECONDARY Solved Papers

BUSINESS STUDIES (April’ 2017)
(319)
NIOS SENIOR SECONDARY Solved Papers
Time: 3 Hours
Maximum Marks: 100

14. State the points of importance of business finance.                                                                3

Ans: Financial management plays the following role:

a) Determination of fixed assets: Fixed assets have an important contribution in increasing the earning capacity of the business. Long term investment decisions also called capital budgeting decision which is one of the prime objectives of a finance manager

b) Determination of current assets: Current assets are needed to meet the day to day transactions of the business. The total investment in current assets is to be determined and the split up into its elements is required.

c) Determination of long term and short term finance: Under this a Finance manager has to maintain a proper ratio of short term and long term sources of finance after estimating its requirement.

d) Determination of proportion of various long term source of finance: A balanced decision related to capital structure is to be made. The proportion of debt and equity is to be determined.

e) Determination of various items in the Profit and loss account: The financial decisions affect the various items to appear in the profit and loss account.

15. State any three objectives of National Stock Exchange of India.                         3

Ans: The main objectives of National Stock Exchange of India are listed below:  

a)  To ensure equal access to investors all over the world.

b) To provide fair, efficient and transparent trading of the securities electronically.

c) To provide facilities of international standards.

16. Briefly describe rolling settlement.                                                                 4

Ans: Rolling Settlement: Earlier trading in the stock exchange was held face-to-face (called pit-trading) without the use of computers and the advanced computer software as it is today. In those times, transactions were settled (i.e., actual delivery of shares, through share certificates, by the seller and payment of money by the buyer) in the stock exchange, only on a fixed day of the week, say on a Saturday, or a Wednesday irrespective of which day of the week the shares were bought and sold. This was called ‘Fixed Settlement’.

Today, with the electronic / computer based system of recording and carrying out of share transactions, stock exchanges go in for ‘rolling settlement’. That means, transaction are settled after a fixed number of days of the transaction rather than on a particular day of the week. For example, if a stock exchange goes in for ‘T+2’ days of rolling settlement, the transaction is settled within two working days of occurring of the transaction, ‘T’ being the day of the transaction. In T+7’ days of rolling settlement, the transaction is settled on the 7th day after the transaction. This is facilitated through electronic transfer of shares, through Dematerialised Account or Demat Account i.e., the share does not have a physical form of a paper document, but is a computerised record of a person holding a share, and through transfer of money electronically or through cheques payment is settled.

17. Explain briefly the different types of mutual fund.                                  4

Ans: Various types of Mutual funds are listed below:

1.       Open-Ended Funds, Close-Ended Funds and Interval Funds:

a)      Open-ended funds are open for investors to enter or exit at any time, even after the NFO.

b)      Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme, from the fund, only during its NFO.

c)       Interval funds combine features of both open-ended and close ended schemes. They are largely close-ended, but become open ended at pre-specified intervals.

2.       Actively Managed Funds and Passive Funds

a)      Actively managed funds are funds where the fund manager has the flexibility to choose the investment portfolio, within the broad parameters of the investment objective of the scheme. Since this increases the role of the fund manager, the expenses for running the fund turn out to be higher.

b)      Passive funds invest on the basis of a specified index, whose performance it seeks to track. Thus, a passive fund tracking the BSE Sensex would buy only the shares that are part of the composition of the BSE Sensex. Such schemes are also called index schemes. Since the portfolio is determined by the index itself, the fund manager has no role in deciding on investments. Therefore, these schemes have low running costs.

3.       Debt, Equity and Hybrid Funds

a)      A scheme might have an investment objective to invest largely in equity shares and equity-related investments like convertible debentures. Such schemes are called equity schemes.

b)      Schemes with an investment objective that limits them to investments in debt securities like Treasury Bills, Government Securities, Bonds and Debentures are called debt funds.

c)       Hybrid funds have an investment charter that provides for a reasonable level of investment in both debt and equity.

18. Briefly explain the merits of public deposits as long-term source of business finance.             4

Ans: Merits of Public Deposits:

a)      Simple: The system is very simple in raising the loans. No too much legal formalities are required to raise finance from this source.

b)      Economical: It is cheap method of raising working capital. The rate of interest is very low as compared to other source of finance.

c)       Elasticity in capital structure: Public deposits keep the capital structure elastic. It does not dilute control.

d)      No security Requirement Deposits are usually unsecured. No security is necessary to raise public deposits.

19. Name and give the meaning of different types of trade on the basis of volume of goods traded.      4

Ans: Generally we buy goods of our daily use from the local shopkeepers. These shopkeepers buy goods in bulk and sell them to us as per our requirement. They generally buy goods in large quantity either from the producers directly or from any other shops that sell goods in bulk. Thus, we find that some shopkeepers buy goods in bulk and sell to others in bulk while other buy in bulk and sell in small quantities as per the requirement of the customers. Thus, on the basis of volume of goods traded we can classify internal trade as:

1.Wholesale trade, and

2.Retail trade.

Wholesale trader is one who sales to other middlemen, institutions and individuals a fairly large quantity. They purchases goods from producers and sale them to retailers. They normally do not have contact with consumers.

Retailer is one whose business is to sell to consumers a wide variety of goods that are assembled at his premises as per the needs of final users. The term retail signifies sale for final consumption rather than for resale or for further processing. A retailer is the last link between the final user and the wholesaler or the manufacturers. Retailer is that merchant intermediary who buys goods from preceding channel members in small assorted lots and sells them in the lot requirements of final users.

20. What is meant by consumer protection? State any four malpractices leading to consumer exploitation.       4

Ans: Consumer protection: Consumer protection refers to the education to the Consumer about their rights and responsibility, getting their grievances redressed and protection of their interest. For e.g.-: Protecting the consumer from black-marketing, adulteration, and hoarding. The most common business malpractices leading to consumer exploitation are given below:

(a)Sale of adulterated goods i.e., adding something inferior to the product being sold.

(b)Sale of spurious goods i.e., selling something of little value instead of the real product.

(c)Sale of sub-standard goods i.e., sale of goods which do not confirm to prescribed quality standards.

(d)Sale of duplicate goods.

21. ‘‘Management is a combination of both science and arts.’’ How? Explain.     5

Management As a Science: Science is defined as a systematized body of knowledge and it uses scientific methods of observation measurement, experimentation etc.  Its principles are exact and university applicable. Similarly, Management has systematized body of knowledge and its principles are evolved on the basis of observation. But management being a social science, it is not an exact science.  So management is a soft or inexact science.

Management As an Art: Art refers to the way of doing specific things i.e. it indicates “how an objective is to be achieved.  it is the know-how to achieve the desired results.  Art needs continuous practice to reach the level of perfection.  An art is application of science. Thus art and science are interrelated in the sense that putting scientific principles into practice requires art, which needs special knowledge and skills.

Management is both a science as well as an art.  The science of management provides certain principles that can guide managers in the professional efforts, while the art of management deals with tackling every situation in an effective manner.  Planning and organizing emphasize the science of management while direction, communication motivation coordination and control emphasize art of management.  Getting work done through people is an art of management.

22. ‘‘The different levels of management taken together form the hierarchy of management.’’ Do you agree? Explain briefly with the help of a diagram.          5

Ans: Low level management                                                                                                     

Low level management is considered as operative management. The first line/operative or low level management includes supervisors, foreman and Inspectors. They are a link between middle level management and workers. They have the following functions:

a)      Representing the problems of workers: They represent the workers’ grievances before the middle level management.

b)      Looking to safety of workers: Lower level managers provides safe and secure work environment for workers.

c)       Control of workers: They assign duties to workers and guide them in handling their jobs efficiently.

d)      Helps in controlling wastage of materials: They prevent wastage of materials by negligent workers which helps in reducing cost.

e)      Ensuring quality standards by the workers: They try to maintain precise standard of quality and ensure steady flow of output.

Middle management

Middle management consists of departmental heads and other executive officers of different departments. They execute the policies framed by the top management. They are a link between the top management and supervisory or lower level of management. Functions of middle level management

a)      Interpretation of policies framed by top management to lower and middle management: They explain the main plans and policies framed by the top management to the lower level.

b)      Preparation of organizational set up: They prepare the organizational set up of their department.

c)       Recruitment/selection of the required employees for their department: They find out suitable personnel and assign duties to them for execution of their department functions.

d)      Motivating the employees: They offer various incentives to employees so that they get motivated and perform to their best ability.

e)      Controlling and instructing the employees: They control and instruct the lower level management and also prepare their performance appraisal reports.

Top management

Top management is the 3rd line of management, which consists of Chairman, Directors, Managing Director, General Manager and other top-level executives required to achieve the goals of the enterprise. For example: Mr. Hazarika has retired as the managing director of a manufacturing company. He is said to be working at top level of management.

The functions of top management are:

a)      Determining the objectives of the enterprise: They determine both long term as well as short term objective of the enterprise.

b)      Framing of plans and policies: They formulate plans and policies to achieve the desired objectives.

c)       Assigning activities to different individuals: They assign jobs to different individuals working at middle level.

d)      Assembling all the resources needed: They assemble the resources such as finance, workers, fixed assets etc. needed to put the plans into operation.

e)      Controlling the performance of employees: They keep a check on the employees and their performance to ensure that plans are implemented in the right direction.

23. ‘‘Management principles are statements of fundamental truth which provide guidelines for managerial decisions.’’ In the light of this statement, briefly explain the points of importance of the principles of management.                5

Ans: Management principles are needed for the following reasons:

a)      Optimum use of resources: The management principle of “science, not rule of the thumb” suggests that every task should be done with minimum effort and energy and additional work can be done with the saved energy. By saving time, efforts and energy activities can be made economical and enhance the productivity of the resources.

b)      Change in technology: The management principle of “division of labour” helps management in identifying in which activity technology has changed. If there is no division of labour then confusion may prevail about what and how much to change.

c)       Effective Administration: The principle of ‘scalar chain’ helps the enterprise to communicate with people at different levels. ‘Unity of direction’ removes confusion in minds of employees; and ‘Unity of command’ avoids dual subordination. Thus these principles help management in managing their organisations effectively.

d)      To make optimum use of resources: The management principles insist on planned activities and systematic organisation of men and material in the organisation which helps in effective use of available resources.

e)      Fulfilling social responsibilities: A business is a creation of society and makes use of resources of society so it must do something for society. Management principles guide the managers to perform their social responsibilities.

24. ‘‘Business people generally face a number of problems in the process of foreign trade.’’ Briefly describe any such five difficulties.                        5

Ans: Problems of International business: In internal trade generally buyers and sellers meet together and transactions take place as per their convenience. But in external trade the situation is completely different. It takes a long procedure to buy and sell the goods and services. The business people generally face a number of problems in the process of foreign trade. The various difficulties, which are faced by the buyers and sellers engaged in external trade are described below:

1. Different currencies: Every country has its own currency. So importer has to make payment in the currency of exporter’s country.

2. Legal Formalities: International business is subject to a large number of legal formalities and restrictions.

3. Distance Barriers: Due to large distance between countries, it is difficult to establish quick and personal contacts between traders from different countries.

4. Language Barrier: Due to different languages in different countries, it becomes difficult for traders to understand the terms and conditions of the contract.

5. Difference in Laws: International business transactions are subject to laws, rule and regulations of multiple countries. International business transactions are subject to laws, rule and regulations of multiple countries.

6. Information Gap: It is difficult to obtain accurate information about foreign markets and about the financial position of foreign merchants.

25. Explain the judicial machinery setup under the Consumer Protection Act, 1986 at the district and state level. 5

Ans: Government of India has framed a set of laws and legislations to protect the interests of consumers and the most important act framed by Government is Consumer Protection Act, 1986. This act has provided three tier Judicial machinery. The judicial machinery set up under the Consumer Protection Act, 1986 consists of consumer courts (forums) at the district, state and national levels. These are known as District forum, State Consumer Disputes Redressal Commission (State Commission) and National Consumer Disputes Redressal Commission (National Commission) separately.

1.       The Central Consumer Protection Council: The Central Government may, by notification, establish with effect from such date as it may specify in such notification, a council to be known as the Central Consumer Protection Council (hereinafter referred to as the Central Council). National Consumer Disputes Redressal Commission: The National Consumer Disputes Redressal Commission has jurisdiction to entertain complaints where the value of the goods or services and compensation if any claimed exceeds Rs.1,00,00,000 (ONE CRORE)

2.       The State Consumer Protection Councils: The State Government may, by notification, establish with effect from such date as it may specify in such notification, a council to be known as the Consumer Protection Council (hereinafter referred to as the State Council). The State Consumer Disputes Redress Commission is established in each state and these have jurisdiction to entertain complaints where the value of goods or services and the compensation if any, claimed exceeds Rs.20,00,000 (TWENTY LAKHS) but does not exceed Rs.1,00,00,000 (ONE CRORE).

3.       The District Consumer Protection Council: Section 8-A as inserted by the Consumer Protection (Amendment) Act, 2002. The State government shall establish for every district, by notification, a council to be known as the District Consumer Protection Council. At the lowest level are the District Forums and these are established in each District and have jurisdiction to entertain complaints where the value of goods or services and the compensation if any, claimed does not exceed Rs.20, 00,000 (TWENTY LAKHS), and a complaint can be filed in a District Forum within the local limits of which

a)      The opposite party resides or

b)      Carries on his business or works for gain or

c)       Where the cause of action arises.

26. What is meant by control? Briefly describe any four characteristics of control.                                           6

Ans: Control is one of the managerial functions. Under controlling deviations are sought to be noticed in the actual work progress and the standards already determined, the causes of deviations are found out and corrective action is taken so that in future the mistakes are not repeated.

According to Henry Fayol, “In an undertaking, control consists in verifying whether everything occurs in conformity with the plan adopted, the instructions issued and principles established. It has to point out weakness and errors in order to rectify them and prevent recurrence”.

Thus, controlling implies determining and stating specifically what is to be accomplished, then checking performance against such standards prescribed with a view to supplying the corrective action required to achieve the planned objectives.

Nature or Characteristics of Control

1)      Control is a function of management: It is, in fact, a follow-up action to the other functions of management.

2)      Control is a dynamic process: It involves continuous review of standards of performance and results in corrective action, which may lead to changes in other functions of management.

3)      Control is a continuous activity: It does not stop anywhere.

4)      Control is forward looking: It is related to future, as past cannot be controlled. It is usually preventive as the presence of control systems leads to minimize wastages, losses, and deviations from standards.

5)      Planning and Controlling are closely related with each other: Managerial planning seeks consistent and integrated while managerial control seeks to compel events to conform to plans. As a matter of fact, planning is based on control and control is based on planning.

OR

State any six points of importance of directing function of management.                                            6

Importance of Directing

1)      To Initiate Action: The employees in the organisation start working only when they get instructions and directions from their superiors. In the directing function the superiors direct the actions of employees toward the predetermined goals of the organisation.

2)      To Integrate Employees’ Efforts: In the organisation numbers of employees are working at different levels and in different job positions. The employees may differ in their levels of authority and the type of job assigned.

3)      Means of Motivation: Directing function does not mean giving orders only but through directions and instructions the superiors try to motivate the employees to perform to their best ability.

4)      Balance in the Organisation: The directing function tries to create balance in the organisation. Generally when the employees are working at different levels they develop different attitudes and the balance between their attitudes is made by directing function.

5)      To Facilitate Change: Generally the employees hesitate in accepting the changes but through directing function the changes can be implemented more easily as while giving directing the superiors guide the subordinates that the changes are better for them also.

6)      Team spirit: Directing involves leadership that essentially helps in creating appropriate work environment and build up team spirit.

27. Explain the steps of the selection procedure.                                                                                             6

Ans: The selection process usually includes a number of steps:

1. Preliminary screening: In this step the candidates who do not fulfill the required basic qualification are eliminated.

2. Selection test: Though these tests, ability and skill of the candidates are measured. Common types of tests conducted by organisation are Intelligence test, Aptitude test, Personality test, Trade test, Interest test.

3. Employment interview: The candidates who qualify the test are called for interview.

4. References & background checks: After the candidate declared successful in the interview then information related to back ground, social relation, and character are indentified.

5. Selection decision: The candidate who passed the test, interview, reference check is included in selection list & the manager’s select most suitable candidate from the list.

6. Medical examination: Before giving appointment letter, the candidates are selected for medical fitness.

7 job offer: For job offer the appointment letter in hand over & a date in the appointment letter is mentioned on which one has to report for the duty.

8. Contract of employment: After the acceptance of job offer by a selected candidate required to sign various documents.

OR

Briefly describe the steps in the process of planning.                                    6

Ans: Steps in the Process of Planning

1.       Setting organizational objectives: The first and foremost step in the planning process is setting organizational objectives or goals, which specify what the organisation wants to achieve.

2.       Developing planning premises: Planning is concerned with the future, which is uncertain. Therefore, the manager is required to make certain assumptions about the future. These assumptions are called premises.

3.       Identifying alternative courses of action: Once objectives are set and assumptions are made, then the next step is to identify all possible alternative courses of action.

4.       Evaluating alternative courses: The positive and negative aspects of each proposal need to be evaluated in the light of the objective to be achieved, its feasibility and consequences.

5.       Selecting the best possible alternative: This is the real point of decision making. The best/ideal plan has to be adopted, which must be the most feasible, profitable and with least negative consequences. Sometimes, a combination of plans may be selected instead of one best plan.

6.       Implementing the plan: Once the plans are developed, they are put into action. For this, the managers communicate the plans to all employees very clearly and allocate them resources (money, machinery, etc.).

7.       Follow-up action: The managers monitor the plan carefully to ensure that the premises are holding true in the present condition or not. If not, adjustments are made in the plan.

28. Describe the modern concept of marketing.                                                                6

Ans: Modern concept of marketing

According to the modern concept, marketing is concerned with creation of customers. Creation of customers means identification of consumer needs and organising business to satisfy these needs. Marketing in the modern sense involves decisions regarding the following matters

1. Products to be produced

2. Prices to be charged from customers

3. Promotional techniques to be adopted to contact and influence existing and potential customers.

4. Selection of middlemen to be used to distribute goods & services.

 There are six concept of marketing which the companies keep in mind:

i) Production concept: As per this concept, companies assume that consumer will always respond to the product made available to them.

ii) Product concept: As per this concept companies realize that the quantity of the product is not sufficient, it is the product quality which is also very important.

iii) Selling concept: Now a days, as the technology advances along with the quantity and quality of the goods, the art of selling the goods are also very essential.

iv) Marketing concept: As consumer is treated as “KING” today. So it is essential for the company to produces and markets the product which the consumer wants. It focuses on consumer satisfaction.

v) Consumer concept: As per this concept, companies’ aims at providing consumers separate offers or services. This is possible through one to one marketing.

vi) Societal marketing concept: This concept requires that company should deliver superior value to the consumer to improve the consumer and the society. It focuses on consumer welfare.

OR

Describe any six qualities of a good sales person.                                            6

Ans: Qualities of a Good salesman:

(a)Good Personality: Personality is a mixture of many traits like physical appearance, dressing-up, way of talking, manners, pitch of voice, habits etc. A Salesman must posses these traits to hold the attention of the customer.

(b)Mental Qualities: A salesperson must have the quality of alertness, imagination, foresightedness, empathy etc. He should have the ability to read the customer’s mind and behave accordingly.

(c)Good Behaviour: A salesperson should be a well behaved person having ability to interact with people comfortably. He/she should be cooperative so that he/she can help people in making up their minds by patiently answering all their questions. Patience and humility will help him/her in not only holding the attention of the customer but also in getting them interested in purchasing the product.

(d)Knowledge: He/she should know every detail relating to the product and the company he/she is representing. He/she should be able to explain the various features of the product, the way it is to be used and the precautions to be taken and so on. Knowledge about competitors’ product is also a must so that the salesperson can explain the superiority of his/her product.

(e)Ability to communicate and persuade: If a salesperson can communicate properly and effectively then he/she will be able to clear the biggest hurdle of making the prospective customer listen to him/her. The salesperson must speak confidently, clearly and audibly. Good communication ability coupled with good knowledge about the product helps the sales person in persuading the customer to buy.

(f)Persistence: The salesperson must know the art of persistence. It requires a sense of determination to convince the customers to buy. He/she must not give up easily. Without being offensive, he/she must persuade the customer to finalise the purchase with a sense of satisfaction.

29. ‘‘Many people consider advertising to be a wasteful activity and harmful for the customers and the society in many ways.’’ In the light of this statement, briefly describe any six limitations of advertising.                                              6

Ans: Several objections have been raised against advertising and some people criticize advertising as a social waste. The main point of criticism is as follows:-

a)      Creates Monopoly in the Market: Advertisement leads to promotion and cover mass level of customers at a time. Large firms can bear the advertisement expenditure but not the small firms, due to that it can eliminate the small firms from the market and creates its monopoly authority in the market.

b)      Higher the Prices of Product: Investment of money in advertisement leads to increase in the price of goods and services for which consumer has to face high prices and pay for it. Hence, more the advertisement cost- more the product cost.

c)       Misleading the consumers: Now days, advertisement misleads the consumers on false representation regarding their goods. Consumer attracts to those goods which are not necessary for them. Thus, advertisement misleads the consumer and sale goods to them.

d)      Wasteful Consumption by the Consumers: Advertisement attracts the consumers for wasteful products which are not necessary for consumers. Due to advertisement businessmen takes undue advantage from them. They sale unhealthy and artificial goods to them and exploits consumer emotions.

e)      Wastage of National Resources: There will be wastage of national resources, valuable stationary, time and energy used by the people or is ignored by them. Here, Valuable resources that can be used to create new industries are wasted in the production of needless varieties and designs.

OR

Explain the elements of product mix.                                                                                    6

Ans: In order to optimise the product requirements by the consumers, importance should be given to the following elements or components of product mix:

1.       Branding: A brand is define as a name, term, sign, symbol or special design or some combinations of these elements that is intended to identify the goods or services of one seller or a group of sellers. A brand differentiates these products from those of competitors. A brand in short is an identifier of the seller or the maker. A brand name consists of words, letters and / or numbers that can be vocalized. A brand mark is the visual representation of the brand like a symbol, design, distinctive colouring or lettering.

2.       Packaging: In this age of competition, good and appropriate packaging occupies much significance^. The policies pertaining to the packaging are a part of the product planning and product development program. The main function of packaging is to protect the things from dust, water, moisture, insects, etc. Good packing saves the products against perishing, loss and other damages.

3.       Labeling: Label is a part on the cover of the product which will devote its name, contents, ownership, expiry date, manufacturing date etc. A label helps in identifying the product. It is full of information about the product. It helps in grading the product. It attracts customers because of its colourful packing.

30. ‘‘The manufacturer has to be careful while finalising the channel of distribution.’’ Briefly explain any four factors that the manufacturer should consider before deciding the channel of distribution.               6

Ans: Factors Affecting the Selection of the Channel of Distribution: Every producer, in order to pass on the product to the consumer, is required to select a channel for distribution. The selection of the suitable channel of distribution is one of the important factors of the distribution decisions. The following factors affect the selection of the channel of distribution:

A. Factors Pertaining to the Product: Keeping in view the nature, qualities and peculiarities of the product, could only the channel for distribution be properly made. The following factors concerning the product, affect the selection of the channel of distribution:

(1)   Price of the Product.

(2)   Perishability.

(3)   Size and Weight.

(4)   Technical Nature.

(5)   Goods Made to Order.

(6)   After-Sales Service.

B. Factors pertaining to the Consumer or Market: The following are the main elements concerned with the consumer or the market:

(1)   Number of Customers.

(2)   Expansion of the Consumers.

(3)   Size of the Order.

(4)   Objective of Purchase.

(5)   Need of the Credit Facilities.

C. Factors Pertaining to the Middlemen: The following are the main factors concerned with the middlemen:

(1)   Services Provided by Middlemen.

(2)   Scope or Possibilities of Quantity of Sales.

(3)   Attitude of Agents towards the Producers' Policies.

(4)   Cost of Channel of Distribution.

D. Factors Pertaining to the Producer Or Company: The following factors, concerning the producer, affect the selection of the channel of distribution:

(1)   Level of Production.

(2)   Financial Resources of the Company.

(3)   Managerial Competence and Experience.

E. Other Factors

(1)   Distribution Channel of Competitors.

(2)   Social Viewpoint.

(3) Freedom of Altering.

OR

Explain the various methods of fixing the price.                                               6

Ans: Pricing Methods: There are several methods of pricing and  they can be grouped into few broad categories:

(1) Cost Based Pricing: Under the cost based pricing, different methods used are:-

Ø  Mark Up Pricing

Ø  Absorption Cost Pricing

Ø  Target Rate of Return Pricing

Ø  Marginal Cost Pricing

Mark Up Pricing: It refers to the pricing methods in which the selling price of the product is fixed by adding a margin to its cost price. The mark ups may vary depending on the nature of the product and  the market. Usually, the higher the value of the product, the larger is the mark up.

Absorption Cost Pricing: ACP rests on the estimated unit cost of the product at the normal level of production and  sales. The method uses standard costing techniques and  works out the variable and  fixed costs involved in manufacturing, selling and  administering the product. By adding the costs of operations, we get the total costs. The selling price of the product is arrived by adding the required margin towards profit to such total costs.

Target Rate of Return Pricing: It is similar to absorption cost pricing. The rate of return pricing uses a rational approach to arrive at the mark up. It is arrived in such a way that the ROI criteria of the firm are met in the process. But this process amounts to an improvement over absorption costing since it uses a rational basis for arriving at the mark up.

Marginal Cost Pricing: It aims at maximizing the contribution towards fixed costs. Marginal costs include all the direct variable costs of the product. In marginal cost pricing, these direct variable costs are fully realized. In addition, a portion of the fixed costs is also realized under competitive market conditions marginal cost pricing is more useful.

(2) Demand Based Pricing: The following methods belong to the category of demand / market based pricing:-

Ø  What the Traffic can Bear’ Pricing

Ø  Skimming Pricing

Ø  Penetration Pricing

What the Traffic can Bear’ Pricing: The seller takes the maximum price that the customers are willing to pay for the product under the given circumstances. This method is used more by retail traders than by manufacturing firms. This method brings high profits in the short term. But in the long run it is not a safe concept, chances of errors in judgment are very high.

Skimming Pricing : This method aims at high price and  high profits in the early stage of marketing the product. It profitably taps the opportunity for selling at high prices to those segments of the market, which do not bother much about the price. This method is very useful in the pricing of new products, especially those that have a luxury or specialty elements.

Penetration Pricing : Penetration pricing seeks to achieve greater market penetration through relatively low price. This method is also useful in pricing of new products under certain circumstances. For e.g. when the new product is capable of bringing in large volume of sales, but it is not a luxury item and  there is no affluent / price insensitive segment, the firm can choose the penetration pricing and  make large size sales at a reasonable price before competitors enter the market with a similar product. Penetration pricing in such cases will help the firm have a good coverage of the market and  keep competition out for some time.

In all demand based pricing methods, the price elasticity of demand is taken into account directly or indirectly.

(3) Competition Oriented Pricing : In a competitive economy, competitive oriented pricing methods are common. The methods in this category rest on the principle of competitive parity in the matter of pricing. Three policy options are available to the firm under this pricing method :

Ø  Premium Pricing

Ø  Discount Pricing

Ø  Parity Pricing

Premium pricing means pricing above the level adopted by competitors. Discount pricing means pricing below such level and  parity pricing means matching competitors pricing.

(4) Value Pricing : Value pricing is a modern innovative and  distinctive method of pricing. Value pricing rests on the premise that the purpose of pricing is not to recover costs, but to capture the value of the product perceived by the customer. Analysis will readily show that the following scenarios are possible with the cost value price chain:

Ø  Value > Price > Costs

Ø  Price > Value > Costs

Ø  Price > Costs > Value

Ø  Price > Value > Costs

(5) Product Line Pricing : When a firm markets a variety of products grouped into suitable product lines, a special possibility in pricing arises. As the product in a given product line are related to each other, sales of one influence that of the others. They also have interrelated costs of manufacturing and  distribution. It can fix the prices of the different product in such a manner that the product line as a whole is priced optimally, resulting in optimal sales of all the products put together and  optimal total profits from the line.

(6) Tender Pricing : Business firms are often required to fix the prices of their products on a tender basis. It is more applicable to industrial products and  products purchased by Institutional customers. Such customers usually go by competitive bidding through sealed tenders. They seek the best price consistent with the minimum quality specification and  thus bag the order.