A Case Study on the Use of Cost-Plus Pricing
A CASE STUDY ON THE USE OF
COST-PLUS PRICING
ABSTRACT
In the business world of economic manufacturing and production, there are actually several ways and approaches for one business entity to recover their production expenses and realize profit. In this aspect, the production output is primarily the key factor in the profit generation of the business as their output serves as their revenue. In the accounting perspective, generation of revenue through using the invested resources of the business will also require additional value which is identified through regarding it as the expense. This expense cost must indeed be recovered through the financial value of the product at the same time incurring profit for the business operation. In this aspect the approach of cost-plus pricing basically operates wherein the financial value of the product is directly based on its production cost and the profit levied unto it by the manufacturing company as their interest. As one of the most common pricing strategy in the present market, this approach is widely implemented and applied by large production firms as it is basically also one of the simplest forms of pricing approach compared to the pricing strategy of target-cost pricing which actually uses the marketing value to determine the product’s cost. The profit that can be realized from cost-plus pricing is indeed stagnant and lesser as this approach is purely dependent on the factors of production cost and profit margin. Price erosion is forcing flexible operations and fast inventory turn rates due uncertainties in the semiconductor manufacturing that need especial management. This case study analyzes the relevance of the prevailing cost-plus pricing approach in Possehl Electronics Malaysia. This analysis will determine what is required for Possehl Electronics Malaysia to undertake in order to successfully transform from cost-plus pricing to a target-costing approach in determining its product prices.
COST-PLUS PRICING
ABSTRACT
In the business world of economic manufacturing and production, there are actually several ways and approaches for one business entity to recover their production expenses and realize profit. In this aspect, the production output is primarily the key factor in the profit generation of the business as their output serves as their revenue. In the accounting perspective, generation of revenue through using the invested resources of the business will also require additional value which is identified through regarding it as the expense. This expense cost must indeed be recovered through the financial value of the product at the same time incurring profit for the business operation. In this aspect the approach of cost-plus pricing basically operates wherein the financial value of the product is directly based on its production cost and the profit levied unto it by the manufacturing company as their interest. As one of the most common pricing strategy in the present market, this approach is widely implemented and applied by large production firms as it is basically also one of the simplest forms of pricing approach compared to the pricing strategy of target-cost pricing which actually uses the marketing value to determine the product’s cost. The profit that can be realized from cost-plus pricing is indeed stagnant and lesser as this approach is purely dependent on the factors of production cost and profit margin. Price erosion is forcing flexible operations and fast inventory turn rates due uncertainties in the semiconductor manufacturing that need especial management. This case study analyzes the relevance of the prevailing cost-plus pricing approach in Possehl Electronics Malaysia. This analysis will determine what is required for Possehl Electronics Malaysia to undertake in order to successfully transform from cost-plus pricing to a target-costing approach in determining its product prices.
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