Target Pricing and Cost Analysis Essay
TARGET COSTING FOR TARGEST PRICINGOne form of market-based pricing is target pricing. A target price is the estimated price for a product or service that potential customers will pay.
This estimate is based on an understanding of customers’ perceived value for a product and how competitors will price competing products. A company’s sales and marketing organizations, through close contact and interaction with customers, is usually in the best position to identify customers’ needs and their perceived value for a product. Companies also conduct market research studies about product features that customers want and the prices they are willing to pay for those features. Understanding what customer’s value is a key aspect of being customer focuses.A company has less access to its competitors.
To gauge how competitors might react, a company needs to understand competitors’ technologies, products, costs, and financial conditions. For example, knowing competitors, technologies’ and products helps a company to (a) evaluate how distinctive its own products will be in the market and (b) determine the prices it might be able to charge as a result of being distinctive.Where does a company obtain information about its competitors’? Usually from customers, suppliers, and employees of competitors. Another source of information if reverse engineering-that’s disassembling and analyzing competitors’’ products to determine product designs and materials and becoming acquainted with the technologies used by competitors. Many companies have departments whose sole job is to analyze competitors with respect to these considerations.Target price, calculated using information from customers and competitors’, forms the basis for calculating target cost. Target cost per unit is the target price minus target operating income per unit.
Target operating income per unit is the operating income that a company aims to earn per unit of a product or service sold. Target cost per unit is the estimated long-run costs per unit of a product or service that enables the company to achieve its target operating income per unit when selling at the target price.What relevant costs should we include in the target-cost calculations? We include all future costs, both variable and fixed, because in the long run, a company’s prices and revenues must recover all its costs. If al costs are not recovered, the company’s best alternative is to shut down-an action that results in forgoing all future revenues and saving all future costs, whether fixed or variable.Target cost per unit is often lower than the existing full cost per unit of the product. Target cost per unit is really just that- a target –something the company must aim for. To target costs per unit, the company must reduce the cost of making its products.
Target costing is used in different industries around the world.COST-PLUS PRICING Instead of using the external market-based approach for their long-run pricing decisions, managers sometimes use a cost-based approach. The general formula for setting a cost based price adds a markup component to the cost base; Cost base $ X Markup component YProspective selling price $X + YManagers use the cost-plus pricing formula only as a starting point for pricing decisions. The markup component is rarely a rigid number. Instead, it is flexible, depending on the behavior of customers and competitors. The markup component is ultimately determined by the marketThe determination of the market price is based on an underlying theory which should be analyzed and explained. To this end a modern approach is followed which endeavors to give better results than the traditional demand and supply analysis, which by means of the demand curve and the supply curve tries to reach a decision linked to a quantity decision should at least be reached by this method. The result of the modern approach should be better than that of the traditional approach.
This is done by reconsidering the assumptions of the traditional approach to justify the substitution of the traditional approach. Without discussing the deficiencies of the traditional approach, it may be concluded that the modern approach endeavors to overcome the deficiencies of the traditional approach. Thus, for arguments sake, the modern approach extends the traditional approach by supplementing it. The determination of the market price considers the market to determine a price which the consumers are prepared to pay and the quantity they will buy.Reference ListAsk, U, Ax, C.
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