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Chapter 11 Pricing Decisions, Including Target Costing and Transfer Pricing

Chapter 11 Pricing Decisions, Including Target Costing and Transfer Pricing. ACG 2071 Fall 2007. Learning Objectives:. External Pricing Decisions Product and Life cycle considerations Auction-market pricing Cost-based methods: Gross Margin Return on Assets Time and Materials

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Chapter 11 Pricing Decisions, Including Target Costing and Transfer Pricing

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  1. Chapter 11Pricing Decisions, Including Target Costing and Transfer Pricing ACG 2071 Fall 2007

  2. Learning Objectives: • External Pricing Decisions • Product and Life cycle considerations • Auction-market pricing • Cost-based methods: • Gross Margin • Return on Assets • Time and Materials • Target costing method • Internal Pricing Decisions • Transfer pricing Use only with permission of Susan Crosson

  3. External Pricing Decisions Product Considerations • Cost Leadership • Differentiation • (Focus) Use only with permission of Susan Crosson

  4. External Pricing Decisions Product Life Cycle Considerations • New/Innovative market • Target Costing • Midlife market • Cost-based or Auction • Declining market • Target Costing Use only with permission of Susan Crosson

  5. External Pricing Decisions Auction-market pricing • Economic Pricing Model • Internet-based • eBay • Priceline.com • Supply or Demand Curve Knowledge Use only with permission of Susan Crosson

  6. External Pricing Decisions Cost-based methods • Gross Margin • Return on Assets • Time and Materials Use only with permission of Susan Crosson

  7. External Pricing Decisions Gross Margin method Price per Unit = Product costs+ SAG expenses + Desired Profit Demand in units E 5 Example: $1,110,000+$540,000+$225,000+$350,000+$250,000 250,000 Cans Or $6.60 + $2.30 + $1.00 =$9.90 per can

  8. Book-based Price per Unit: Gross Margin method Gross Margin-based Price = Unit Product cost + Markup %(Unit Product cost) Unit Product cost = Product costs/Units Mark up % = (Desired Profit + SAG)/Product cost E 5 Example: Product cost=($1,110,000+$540,000) = $1,650,000 Unit Product cost= $1,650,000/250,000 cans = $6.60 Markup % =($250,000+$225,000+$350,000)/$1,650,000=50% Or $6.60 + 50% ($6.60) =$9.90 per can

  9. External Pricing Decisions Return on Assets method Price per Unit = DesiredTotal Assets Employed Product costs + SAG expenses + ROA % X Demand in units per unit per unit E 5 Example: $6.60 + $2.30 + 10%($1,000,000/250,000 cans)=$ 9.30 per can

  10. What Do You Know?External Pricing Decisions Two Cost-based methods Compute the Price: • Gross Margin method • Return on Assets method • E 6 • E7 • Look and listen SE4 Use only with permission of Susan Crosson

  11. External Pricing: Time and Materials Price Computation: Material Cost + % Markup for Overhead + Labor Cost + % Markup for Overhead + Markup for Profit Price E 9 Example: $12,700+60%($12,700)+ $7,900+40%($7,900) + 25%($31,380*) = $39,225 *total of materials, labor, and overhead

  12. External Pricing Decisions Target costing method Target Price - Desired Profit = Target Cost Compare Target and Actual costs E 13 E 12 Look and list0en SE7 Use only with permission of Susan Crosson

  13. External Pricing: Target costing method E 13 Example: Target Price - Desired Profit =Target Cost $7,500 – 25%(Target Cost) = 100%(Target Cost) $7,500/(25% + 100%) = Target Cost $6,000 = Target Cost versus Actual cost =$5,587 =$51+$42+$300+$1,500+$570+$400+$1,620+$840+$84+$150 Yes, market Auto Drill

  14. Internal Pricing Decisions Transfer pricing • Internal Service Providers • Market-based price • Negotiated price (cost plus) • Full cost recovery price • Variable cost recovery price Look and listen SE10 Use only with permission of Susan Crosson

  15. Internal Pricing Decisions Transfer pricing E 14 Example: • Market-based price = $13.00 • Negotiated price = Cost+%(Cost) $13.60 = $11.40+20%($11.40) $10.56 = $8.80+20%($8.80) • Full cost recovery price $11.40 = $5.20+$2.30+$1.30+$2.60 • Variable cost recovery price $8.80 = $5.20+$2.30+$1.30

  16. Homework • P4 Use only with permission of Susan Crosson

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