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Target Costing and Cost Analysis For Pricing Decisions: Mcgraw-Hill/Irwin
Target Costing and Cost Analysis For Pricing Decisions: Mcgraw-Hill/Irwin
15-1
McGraw-Hill/Irwin
Major Influences on
Pricing Decisions
Customer Political, legal,
demand and image issues
Pricing
Decisions
Competitors Costs
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How are Prices Set?
Costs Market
Forces
15-3
Role of Accounting
Product Costs in Pricing
Optimal Decisions Suboptimal Decisions
Economic pricing model Cost-based pricing
Sophisticated decision Simplified decision
model and information model and information
requirements requirements
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Cost-Plus Pricing – Example (1/5)
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Cost-Plus Pricing – Example (2/5)
Advantages Disadvantage
Does not obscure Fixed costs may be
cost behavior overlooked in
patterns. pricing decisions,
resulting in prices
Does not require that are too low to
fixed cost cover total costs.
allocations.
More useful for
managers.
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Determining the Markup:
Return-on-Investment Pricing (1/6)
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Determining the Markup:
Return-on-Investment Pricing (2/6)
Income
ROI =
Invested Capital
Income
20% =
$300,000
Income = 20% × $300,000
Income = $60,000
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Determining the Markup:
Return-on-Investment Pricing (4/6)
Step 2: Recall the unit cost information below.
Solve for the unit sales price necessary to
result in an income of $60,000.
$60,000
Unit sales price − $800 unit cost =
480 units
Unit sales price − $800 unit cost = $125 per unit
Unit sales price = $925
15-17
Determining the Markup:
Return-on-Investment Pricing (6/6)
Step 3: Compute the markup percentage on
the $400 variable manufacturing cost.
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