Product Pricing Chapter 12 A200 Survey of Accounting University of Tennessee Fall 2015 2 Product Pricing Businesses typically set prices for their products using one of two methods Cost plus Pricing total cost method Total costs are known Product price is total cost plus profit Market based Pricing target cost method Product price is determined by external market forces Total cost is price minus profit 3 Product Pricing Cost plus Cost plus Pricing The price set for a product must be high enough to cover total costs and provide a profit Desired Profit A percentage of the assets Invested Assets that managers were given to make the product with Price Total Cost Desired Profit Price per unit Total Cost per unit Desired Profit per unit 4 Product Pricing Cost plus Mason Company has budgeted planned 2015 sales of 10 000 units of Product A Managers need to set a price for the product Mason Company invested assets of 500 000 in making Product A Mason s owners want a 15 profit on invested assets The budgeted costs for Product A are Direct Materials cost variable 175 000 Direct Labor cost variable 90 000 Factory Overhead cost variable portion 27 000 Factory Overhead cost fixed portion 52 000 Selling Administrative Expense variable portion 65 000 Selling Administrative Expense fixed portion 40 000 5 Product Pricing Cost plus Total Costs 449 000 Total Profit 75 000 Total Price 524 000 Product A s price per unit 524 000 10 000 units 52 40 per unit Profit is also called markup Markup Percentage Total Profit Total Cost 75 000 449 000 16 7 A 16 7 markup percentage means that cost was increased marked up by 16 7 to arrive at the selling price 6 Product Pricing Cost plus Some common markup percentages for retail businesses New cars 15 Used cars 75 Electrical Appliances 30 Clothing 50 Trend Clothing 59 Cosmetics Fragrances 80 Crystal Ware 60 Gifts and clocks 55 Restaurant Food 45 Restaurant Wine 100 Used Auto Parts 49 Greeting Cards 90 Mobile Food Vendors Cold food 100 Hot food 200 per Wikipedia and CCH Business Owner s Toolkit 7 Product Pricing Target Cost Market based pricing Selling price is set by the market outside forces Management must fit costs to the price it can charge for the product given the profit it wants Target Cost Pre set Price Desired Profit Mason Company sells Product B in a highly competitive market It can sell only 6 000 units and it can charge only 30 00 per unit If investors want a return of 15 on the invested assets of 500 000 what is the maximum cost Mason can afford to make Product B Target Cost Pre set Price Desired Profit TC 30 00 per unit 12 50 per unit TC 17 50 per unit 500 000 x 15 75 000 6 000 units 12 50 u
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