Question

What conditions must exist to achieve accurate short-run pricing decisions using variable costing?

Short answer

Short-run pricing decisions incorporate adjusting product mix in a competitive environment for a one-time-only special order incorporates an examination of all direct and indirect variable costs.

Step-by-step solution

Introduction to short term pricing decision-

Short-run pricing decisions with no long term implication such as 6 months or less incorporate pricing for a one-time-only special order. Business firms can experience circumstances where they are faced with the opportunity of bidding with other suppliers for a one-time special order in competition.

Condition to be satisfied-

Variable costing likewise applies to service companies. Since service companies do not produce inventory, the differences in income from absorption and income from variable costing shown for a manufacturer do not apply. Still, a focus on variable costs can be useful in managerial decisions for service firms. Example is “special order” pricing for airlines. When the airline sell tickets shortly before a flight at highly discounted prices. If the discounted price exceeds variable costs then such sales rises contribution margin and net income.