Lecture 8

Question 1

what is problem with cost plus pricing ?

How do you workout price?

Answer 1

-price might unacceptable to customers
- assumes that cost budget should be made before
- does not consider external factors

Unit cost + unit profit

Question 2

What does target costing mean?
And how do you workout it out
What is cost gap? + how do you work it out

Example 1 simple target costs
E.g business is considering whether or not to launch a new product. The sales department. Has determined a realistic selling price. £20 per unit. All products generates gross profit of 40% of selling price.
How much is target costs?

Example : Roi on target costs
E.g this company launch a new product. Which requires a return on investment 30%. Buildings ad equipment needed for production will cost £5,000,000. The expected sales are 40,000 units at selling price of 67,50
Calculate the target costs

Example of markup given on target costs:
- company selling price is 10,50 per unit
- wants to achieve a mark up of 50%
Workout target costs for this product

Answer 2

• market driven approach
  selling price - unit profit ( markup)

Cost gap = estimated actual cost with target cost is cost gap
- if the actual cost is higher - reduce costs
If there is no way meeting the target costs then the product should not be produced.
- we will always have cost gap.
Cost gap : expected costs - target costs

Example
Target = selling price - unit profit
First workout unit profit by doing 40 x20 =800 / 100= 8
Selling price ( 20 ) - 8 (unit profit ) = 12
Target cost is £12

Example 2
Target costs = selling price - unit profits
Roi = 5,000,000 x 30 = 1.5m
40,000 x 67=2.7m
Target cost = 2.7-1.5/40,000=2.7 per unit
First thing you do is
Roi cost x percentage
Then do sales x selling price
Do Roi - revenue / how much units your selling

E.g
When there is a markup you do
Selling price / 1 + markup percentage
For e.g selling price here is 10.50
And markup is 50%
10.50/ 1 +0.5 =7.
Target cost would be £7

Question 3

How do you close the costing gap?

Why is it difficult to use target costing in service industries? 5 characteristics

Answer 3

1. Choose cheaper materials without comprismsing quality
2. Reduce labour costs
3. Improve productivity

Difficult to use it service industries because of characteristics
1. Intangibility
2. Inseparability
3. Variability
4. Perishability
5.no transfer of ownership

Question 4

What is product life cycle? 5 stages
How do you workout life cycle per unit? What do you if the life cycle per unit is above the target costs Example of

Answer 4

1. Development stage = no sales and highes investment costs
2. Introduction stage = sales volume is very low and sales growth is slow
3. Growth stage = sales and profits increase rapidly
4. Maturity stage = sales peak but growth declines
5. Decline stage = sales volume declines

Lifecycle pet unit : total lifetime costs / total units sold
1. Add all units you plan to sell over the products lifetime
Year 1 =2,000 units
Year 2= 2-5 12,000 units x 4 = 48,000
Total units is 48,000+2,000=50,000

2. Add up all costs for the product
   Manufacturing costs : £6 x 50,000
   Design and development cost : 60,000
   End of life costs = 30,000
   Total costs : 390,000
3. 390,000/50,000=7.80
   If it above the target costs we will not make the product.

Question 5

What is the advantage of life cycle costing`/

Answer 5

1. Consider external factors
2. Consider all costs
3. Very useful for competive environment