Capacity Acquisition, Capacity Cost Allocation, and Pricing for New Product Introduction

29 Pages Posted: 12 Jul 2003

See all articles by Birendra K. Mishra

Birendra K. Mishra

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Dhinu Srinivasan

University of Pittsburgh - Katz Graduate School of Business

Ashutosh Prasad

University of California, Riverside (UCR)

Abstract

Using a two-product and two-period model, we investigate optimal capacity acquisition and capacity cost allocation for product costing and pricing decisions for existing and new products under long-term capacity commitment. The existing product is produced in both periods, while the new product is produced only in the second period. The insights we obtain differ from those in earlier literature and complement them. We find conditions under which the capacity charge for existing products when idle capacity exists can be more or less than the capacity charge when the firm introduces new products to better utilize the capacity. A necessary requirement for the capacity charge for the existing product in the first period when there is idle capacity to be greater than the capacity charge in the second period when the capacity is better utilized is that the demand for the two products be negatively correlated. The result provides a rationale for the variety of cost allocation schemes used in practice.

Keywords: product costing, fixed costs, pricing, capacity, new product introduction

JEL Classification: M40, M46, D40

Suggested Citation

Mishra, Birendra K. and Srinivasan, Dhinu and Prasad, Ashutosh, Capacity Acquisition, Capacity Cost Allocation, and Pricing for New Product Introduction. Available at SSRN: https://ssrn.com/abstract=420781 or http://dx.doi.org/10.2139/ssrn.420781

Birendra K. Mishra

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States
951-827-7707 (Phone)
951-827-3970 (Fax)

Dhinu Srinivasan (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States
412-648-1513 (Phone)
412-648-1693 (Fax)

Ashutosh Prasad

University of California, Riverside (UCR)

900 University Avenue
Riverside, CA 92521
United States

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