Pricing Goods for External Sales
Pricing Objectives: gain market rate of return
Environment: Political reaction to prices patent or copyright protection
Demand: Price sensitivity demographics
Cost Considerations: Fixed and variable costs short-run or long-run
In the long run, a company must price its product to cover its costs and earn a reasonable profit
Most case: Company does not set the prices, competitive market does
Price takers: the companies cannot set the price of gasoline by itself; the price of gasoline is set by market forces (the supply of oil and the demand by customers)
Ex: farm products or minerals
1. The Company set the prices. (Special order)
2. A company can effectively differentiate its product or service from others. (In competitive market, like coffee)
The cost that will provide the desired profit on a product when the seller does not control over the product’s price
Market Price – Desired Profit = Target Cost
A process whereby a product’s selling price is determined by adding a markup to cost base.
The amount added to a product’s cost base to determine the product’s selling price.
Selling Price – Cost = markup (Profit)
Target selling price
The selling price will provide the desired profit on a product when the seller has the ability to determine the product’s price.
Cost + Markup = Target selling price | Per Unit | Direct material | $ | Direct labor | $ | Variable manufacturing overhead | $ | Variable selling and administrative expense | $ | Variable cost per unit | $ |
| Total Costs | / | Budgeted Volume | = | Cost per unit | Fixed manufacturing overhead | $ | / | $ | = | $ | Fixed selling and administrative expense | $ | / | $ | = | $ | Fixed cost per unit | | | | | $ |
Return on investment (ROI)
(Desired ROI Percentage * Amount Invested) / Units Produced = Markup
Markup (Desired ROI per Unit) / Total Unit Cost = Markup