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Topic Discussion
01 Executive Summary
06 Conclusion
Target costing results in lowering cost which will change mark up in cost-plus
pricing. This will make the target price and the ultimate sales price changes
too, while the sales price is needed to determine the target cost, but in the
other side the determination of this sales price is the focus of the cost plus
pricing mechanism.
EXECUITVE SUMMARY
Defining Target Costing and Cost-Plus Pricing
Combining the target costing deductive and the The measurement of makrup (r)
cost-plus pricing method with subtituted TC for C (equation 6)
(equation 4)
Pi=TCi+rTCi
Substituting the value of markup
(equation 5) (equation 7)
Pi=Tci(1+r)
Based on the observation that emerge from the equations 1,2,3, and
7. at first glance, from the additive method, it does not show any
mechanism to tie individual product components’ costs to management’s
target profits. On the other side, the deductive method appears
inapplicable to cost plus pricing system because, in this method the sales
price must be given, but in cost-plus pricing, determining the price is the
goal.
COST-PLUS PRICING USING THE
DEDUCTIVE METHOD
Variable manufacturing costs (TCi) = Direct Materials + Direct Labor + Variable Overhead
= 100+400+320 820
Other Costs (C'i) = Fixed Overhead + Downstream Costs
= 150+150+100+100 500
Investment allocated to the contract = 8000 x 25% 2000
Target ROI on the contract = 2000 x 20% 400
Target Sale Price (pi) = 820 [ 1 + ( 500+400) / 820 ] 1720
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