Post on 24-Dec-2015
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Learning Objectives:External Pricing DecisionsProduct and Life cycle considerationsAuction-market pricingCost-based methods:
Gross MarginReturn on AssetsTime and Materials
Target costing method
Internal Pricing DecisionsTransfer pricing
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External Pricing Decisions Product Considerations
Cost Leadership
Differentiation
(Focus)
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External Pricing Decisions Product Life Cycle
ConsiderationsNew/Innovative marketTarget Costing
Midlife marketCost-based or Auction
Declining marketTarget Costing
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External Pricing Decisions Auction-market pricing
Economic Pricing ModelInternet-basedeBayPriceline.comSupply or Demand Curve Knowledge
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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 ProfitDemand 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
Book-based Price per Unit: Gross Margin method
Gross Margin-based Price = Unit Product cost + Markup %(Unit Product cost)
Unit Product cost = Product costs/UnitsMark up % = (Desired Profit + SAG)/Product cost
E 5 Example:
Product cost=($1,110,000+$540,000) = $1,650,000Unit Product cost= $1,650,000/250,000 cans = $6.60Markup % =($250,000+$225,000+$350,000)/$1,650,000=50%
Or $6.60 + 50% ($6.60) = $9.90 per can
External Pricing Decisions Return on Assets method
Price per Unit = Desired Total Assets
EmployedProduct 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
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What Do You Know?External Pricing Decisions Two Cost-based methods
Compute the Price:Gross Margin methodReturn on Assets method
E 6E7Look and listen SE4
External Pricing: Time and MaterialsPrice 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
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External Pricing Decisions Target costing method
Target Price - Desired Profit = Target Cost
Compare Target and Actual costs
E 13E 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 = $13.00Negotiated 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