Академический Документы
Профессиональный Документы
Культура Документы
Soft Rolls
P10.00
4.00
2.50
Labor
1.50
2.00
Variable Overhead
0.50
0.50
Total
6.00
5.00
P4.00
P4.00
Shut down point= Fixed costs if operations are continued - Shut down costs
Contribution Margin Per Unit
Illustrative Problem
The ABC Company, now operating below 50% of its poractical capacity
expects that the volume of sales will drop below the level of 5,000 units per
month. An operating statement prepared for the monthly sales of 5,000 units
shows the following:
P15,000
Less:
Variable Costs ( 5,000 units at P2 )
Non-variable costs
Net Income
P10,000
5,000
15,000
-0-
Cost-Plus Pricing
The most common baisc approach in opricing decision is that the price of the
product or service should cover all the costs that are traceable to the product
and service, variable as well as fixed. If revenues are not sufficient to cover
these traceable costs, then the firm would be better off without the product
or service. In addition to treaceable costs, all products and services must
assist in covering the common costs of the organization. These common
costs may include general factory, selling and administrative costs. And of
course, the selling price should not only cover all the costs of the organization
but also provide a return on invested capital.
The Cost-Plus Pricing formula
Target Selling Price = [ Cost + ( Markup percentage x Cost) ]
Products however, may be costed in at least two different ways:
1. By the absorption approach where the cost base is defined as the cost to
manufacture one unit and therefore excludes all selling general and
administrative expenses.
2. By the contribution approach where cost base consists of all the variable
costs associated with a product including variable selling, general and
administrative expenses (SGA).
Illustrative Problem
Assume that Knox Company is in the process of setting a selling price on a
product that has just undergone some modifications in design. The following
cost estimates for the redesigned prtoduct have been provided by the
Accounting Department:
Per Unit
Total
Direct Materials
Direct Labor
Variable manufacturing overhead
P12
8
6
Markup percentage on absorption cost= Desired return on assets employed SGA expenses
Volume in units x Unit manufacturing costs
Target Costing
This pricing approach is used when company will already know what price
should be charged and the problem will be to produce the product that can
be marketed profitably. Target Costing is the process of determining the
maximum allowable cost for a new product and then developing a sample
that can be profitably manufactured and distributed for that maximum target
cost figure.
The target cost is computed as follows:
Target cost = Anticipated Selling Price - Desired Profit
Illustrative Problem
Karate Auto Supply, Inc., is a producer and distributor of auto supplies. The
company desires to enter a rapidly growing market for long-life batteries that
is based on a newly discontinued technology. Management believes that to
be fully competitive, the new battery that the company is planning can not be
priced at more than P1,300. At this price, management is confident that the
company can sell 12,500 batteries per year. The batteries would require
permanent investment of P5,000,000 and the desired ROI is 20%. Compute
the target cost of one battery.