When does the market place dictate price of a product?
Target cost: Cost that provides the desired profit when the market determines a product's price.
When is target costing used?
· When the market determines the price
· Do it with a product you cant differentiate
· Determine desired...
When does the market place dictate price of a product? - ANSWER- Target cost:
Cost that provides the desired profit when the market determines a product's
price.
When is target costing used? - ANSWER- · When the market determines the price
· Do it with a product you cant differentiate
· Determine desired profit
· Sales Price - Desired Profit = Target Cost
Time & Material pricing used most often by what industry? - ANSWER- Service
companies
Time & Material pricing step 1 - ANSWER- · Calculate the Labor Rate
o Express as a rate per hour of labor.
o Rate includes:
§ Direct labor cost (includes fringe benefits).
§ Selling, administrative, and similar overhead costs.
§ Allowance for desired profit (ROI) per hour of employee time.
o Labor rate for Lake Holiday Marina for 2025 is based on:
§ 5,000 annual labor hours.
§ Desired profit margin of $8 per hour of labor.
Time & Material pricing step 2 - ANSWER- · Calculate Material Loading Charge
o Material loading charge added to invoice price of materials.
o Covers the costs of purchasing, receiving, handling, and storing materials plus
desired profit margin on materials.
o Expressed as a percentage of estimated costs of parts and materials for the
year:
§ Estimate total annual costs for purchasing, receiving handling, and storing
materials
§ Divide that amount by total estimated cost of parts and materials
§ Add a desired profit margin
Time & Material pricing step 3 - ANSWER- · Calculate Charges for a Particular Job
, o Labor charges + Material charges + Material loading charge
Minimum acceptable transfer price with and without capacity & what is the
opportunity cost when setting minimum transfer price? - ANSWER- · Opportunity
cost depends on if we have capacity (no capacity = CM per unit)
· If we have capacity, the OC is zero
Advantages and disadvantages of cost-plus pricing - ANSWER- · Advantage of
cost-plus pricing: Simple to compute.
· Disadvantages:
o Does not consider demand side:
§ Will the customer pay the price?
o Unit fixed cost changes with change in sales volume:
§ At lower sales volume, company must charge higher price to meet its desired
ROI.
Equation for minimum transfer price (and what the terms mean) - ANSWER- · VC
+ OC = Minimum Transfer Price
· Trying to maximize the entire company's profitability, not the individual
divisions
Components of time and material pricing - ANSWER- · Made up of three items
o Time = Labor charge
o Material = Material charge
o Material loading charge
Compute target cost when selling price is given - ANSWER- · Selling price -
desired profit = Targeted costs
· Desired Profit = Return on Investment (ROI)
Compute ROI for given $$$ of investment - ANSWER- Investment x ROI Target %
= Amount / Target Unit Sales = ROI per unit
Compute Target cost per unit - ANSWER- · Selling price - desired profit =
Targeted costs
Compute minimum transfer price - ANSWER- · VC + OC = Minimum Transfer Price
· If we do have capacity = VC + CM that we would be getting from the outside
Master Budget & components thereof - ANSWER- · Helps to get everyone on the
same page and communication flowing
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