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Target Cost
Market Price - Desired Profit
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Return on investment (ROI)
- Net income ÷ Invested assets
- ex: 1mil invst expt rnt 20% 1mil*.20=200K
- 10K units produced 200K÷10K=$20 per unit
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Target Selling Price
- Cost + (Markup % x Cost) or
- cost + ROI
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Target Selling Price perU
- Total Unit Cost + (Totl Unt Cst x markup%) or
- total cost per unit + ROI per unit
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Markup Percentage
Desired ROI perU ÷ Total Cost PerU
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Time and material pricing
- 1) calculate the per hour labor charge rate
- (2) calculate the charge for obtaining and holding materials %
- (3) calculate the charges for a particular job
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T/M Caluclate Labor Charge
- (1) DL cost of emplye, incldg hrly rt or salary & fringe benefits
- (2)selling, administrative, and similar overhead costs
- (3) an allownce for desired profit or ROI p/hr of emplye time
- ex: $103K (mec wages)÷10K hrs (total hrs) = 10.3 (add all)
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TM Calculate Material Loading Charge
- (1) Est totl ann csts for purch, recv, hndl, & storing materials.
- (2) divides this amount by the totl est cst of parts and materials.
- (3) It adds a desired profit margin on the materials themselves
- ex: $13K (matrl chg) ÷ $130K = 10% (add all)
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TM Calculate Charges for a paticular job
- (1) the labor charge
- (2) the charge for the materials
- (3) the material loading charge
- ex: 12 hrs x $50 rate + $500 mat+($500 x 10%rate)
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Possible approaches for determining a transfer price:
- 1. Negotiated transfer prices.
- 2. Cost-based transfer prices.
- 3. Market-based transfer prices.
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Contrubution Margin (AKA Opportunity Cost)
Selling Price - Variable Price
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Min Transfer Price No Excess Capacity
Variable Cost + Opportunity Cost (AKA Cont Margin)
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Min Transfer Price Excess Capacity
Variable Cost + $0 Opportunity Cost
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Absorption cost pricing (GAAP aprvd)
- 1) Compute Unit manufacturing costs
- 2) Compute Markup Percentage using formula:
- Dsrd ROI pu+Selling/Admin Exp pu=Markup% x Mfg cost pu
- 3) Set target selling price using formula:
- Mfg cost pu + (markup% x Mfg cost pu)
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Variable Cost Pricing
- 1) Compute unit variable cost
- 2) Compute Markup Percentage using formula:
- Dsrd ROI + Fxd Cost pu = Markup% x Variable Cost pu
- 3) Set target selling price using formula:
- Var Cost pu + (Markup% x Var Cost pu)
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