Pricing Calculations Flashcards
What is cost-plus pricing?
sales price = cost + % mark up
What is full cost-plus pricing?
Total costs x mark up %
How do we determine the mark up applied?
selling price/full cost - 1
What are the advantages and disadvantages of full cost-plus pricing?
Quick and easy, can be delegated, price increases can be justified as costs rise, should cover costs
Reduces incentives to control costs, requires arbitrary absorption of overheads into product costs
What is marginal cost-plus pricing?
Marginal cost x mark up
How to calculate a margin?
sales price = 100%, cost of sales = (100-x)% of sales price
profit = x% of sales price
How to calculate a mark up?
sales price = (100 + x)% of cost, cost of sales = 100% of cost
profit = x% of cost
What are the standard results to calculate price based on cost?
Mark up: cost x (1+ mark up %)
Margin: cost x 100/(100-margin)
What is a transfer price?
Prices used on transactions between related parties
What are the aims of a transfer pricing system?
Realistic measurement of divisional profit
Realistic profit to supplier
Autonomy to managers
Goal congruence
Profit maximisation
What is goal-congruent decision-making?
Maximising the contribution earned by company
Disregard fixed costs and focus on variable costs and revenues
Division managers increase contribution to division
Goal congruent decisions increase contribution of whole company
What is the optimum transfer price?
If there is no spare capacity: market value less any cost savings from internal transfers
If there is spare capacity: variable production costs of goods
How does a cost-plus approach to transfer pricing work?
Transferring division determines transfer price by adding a profit mark-up
When will/won’t a company buy-in from external suppliers?
Will: buy-in price < revenue from transferring centre selling externally, buy-in price < variable cost of production
Won’t: opposite
What is a two-part transfer price?
Transfers charged at predetermined standard value
Lump sum for fixed costs
What is dual pricing?
Supplying division credited with a different price charged to the receiving division
Charges receiving division for all transfers at variable or marginal cost
Supplying division credited with market value or with cost-plus transfer price
