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

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

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

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 Cans Or $ $ $1.00 = $9.90 per can

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) = $9.90 per can

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

Use only with permission of Susan Crosson 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

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

Use only with permission of Susan Crosson 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

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

Use only with permission of Susan Crosson 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

Internal Pricing Decisions Transfer pricing E 14 Example: Market-based price = $13.00 Negotiated price = Cost+%(Cost) $13.60 = $ %($11.40) $10.56 = $ %($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

Use only with permission of Susan Crosson Homework P4