UT Knoxville ACCT 200 - Chapter 12 (10 pages)

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Chapter 12



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Chapter 12

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Pages:
10
School:
University of Tennessee
Course:
Acct 200 - Foundations of Accounting
Foundations of Accounting Documents

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Product Pricing Profit in Bottleneck Conditions Chapter 12 A200 Survey of Accounting University of Tennessee 2 Product Pricing Businesses typically set prices for their products using one of two methods Cost plus Pricing total cost method Product cost is known Product price is based on cost Market based Pricing target cost method Product price is determined by external market forces Product cost is derived from the price 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 Price Total Cost Desired Profit Price per unit Total Cost per unit Desired Profit per unit Desired Profit A percentage of the assets Invested Assets that managers were given to make the product with Owners are always looking for a return on their investments and profit is the return they want on the assets they invested in making products 4 Product Pricing Cost plus Line Company has budgeted sales for 2012 of 10 000 units of Product A Managers need to set a price per unit for the product Line Company invested assets of 500 000 in making Product A Line s owners want a 15 profit on invested assets return on investment 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



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