Chapter 14-5 Flashcards
involves adding a markup to a cost base to determine the selling price
cost plus pricing
serves as the starting point for setting prices
cost base
is flexible and influenced by customer behavior and competitor actions
markup component
ultimately determine the size of the markup
markup conditions
the markup percentage is determined base on a
target rate of return on investment
target rate of return on investment equation
target rate of return on investment =
target annual operating incomoe / invested capital
invested capital = total assets (long term assets plus current assets)
ensures that the price of a product exceeds the full cost in the long run, preventing price cuts that only cover variable costs and lead to losses
full recovery of all costs
limits the ability and temptation of salespeople to cut prices, promoting stable prices which facilitate accurate forecasting and planning
price stability
this method involves setting a price based on the full cost of a product plus a markup percentage
cost plus pricing
in competitive markets, companies may need to adjust their markup and prices based on customer and competitor reactions
market adjustments
this approach starts with determining the product characteristiscs and target price based on customer preferences and competitor responses, then compute the target cost
target pricing
firms like accountants, consultants, and lawyers use
cost plus pricing
used bu service companies such as home repair and automobile repair services, this method prices jobs based on the cost of materials plus a markup and the cost of labor plus a markup
time and materials method
teh selling prices computed under cost plus pricing are
prospective prices
