Chapter 10 Flashcards
Total Cost
TC=D*P + (D/Q)*S + (Q/2)* P*h D = Demand P= price Q= EOQ h= holding cost S= shipping
Cost approach
Price is set greater than direct costs, allowing for sufficient contribution to cover indirect costs and overhead, and leaving a margin for profit
Market approach
Prices are set in the marketplace and may not be directly related to cost (high/low prices depends on supply and demand)
Price Analysis
(the comparison of a supplier’s price with a benchmark price)
Benchmark Price
other competing bids (when specifications are clear and little differentiation between quality or deliver, Published prices, previously paid price, Producer Price Index
Producer Price Index
((PPI measures avg. change over time in selling prices received by domestic producers for their output; measures price change from perspective of the seller
Cash Discount
Cash discounts are meant to encourage prompt payment of an account
(Understand 2/10 net 30 cash discount): Discount of 2% is given if payment is made within 10 days; gross amount is due in 30 days
If the company pays after 30 days, the effective cost of using the cash for 20 days is 2%
In a 360-day year, there are eighteen 20 day periods which translates into an effective annual interest rate of 2%x 18 = 36%
Trade Discount
A trade discount is granted by a manufacturer to a particular type of distributor or user; Aim to protest the distributor by making it more profitable for a purchaser to buy from the distributor than directly from the manufacture
Quantity Discount
Quantity discounts may be granted for buying in certain quantities and vary in proportion to the amount purchased.
Firm Fixed Price
Price not subject to change under any circumstances; market conditions are stable; financial risks are otherwise insignificant; most favorable to buying organization, and financial risk is borne by supplier
Adjustable Price
Price adjustment provisions (also called escalation and de-escalation clauses) protect the parties from risks associated with inflation or deflation; Price adjustment provisions allow for fluctuations (i.e., increases or decreases) in price due to changes in costs associated with material and/or labor; Buyers and sellers usually agree that pricing will change based upon fluctuations of an objective measurement of price changes such as the Producer’s Price Index.
Cost - Based Price
Used when it is not possible or practical to determine a price in advance; Involve the creation of a unique product or the provision of a unique service where the supplier has no history of the costs involved, therefore the amount that the buying organization will ultimately pay will depend on the supplier’s actual costs.
Cost plus fixed fee (CPFF)
If the item is experimental and the specifications are not firm, or if future costs cannot be predicted; Buyer to reimburse supplier for all reasonable costs incurred (under a set of definite policies under which “reasonable” is determined) in doing the job or producing the required item or service, plus a specified dollar amount of profit (Contract incentive: Encourage supplier to control cost: as cost increases ◊ profit percentage declines)
Cost-Plus-Incentive-Fee (CPIF):
Both buyer and seller agree on a target cost figure, a fixed fee, and a formula under which any cost over- or underruns are shared. (Contract incentive: encourage suppliers to cut cost.)
Cost-No-Fee (CNF):
Only costs are reimbursed; Buyer must persuade supplier that there will be enough subsidiary benefits from doing a particular job
Ex. Supplier do some research to gain some advanced technological or product knowledge, which then may be used to make large profit
