Chapter 11Pricing Decisions, Including Target Costing

and Transfer Pricing

ACG 2071

Fall 2007

Use only with permission of Susan Crosson

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

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

ConsiderationsNew/Innovative marketTarget Costing

Midlife marketCost-based or Auction

Declining marketTarget Costing

Use only with permission of Susan Crosson

External Pricing Decisions Auction-market pricing

Economic Pricing ModelInternet-basedeBayPriceline.comSupply 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 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

Use only with permission of Susan Crosson

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

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 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

Use only with permission of Susan Crosson

Homework

P4