Target Costing (Pricing Decisions)

Question 1

3C’s to Consider in Pricing Decisions

Answer 1

Customer
Competitor
Costs

Question 2

3 Approaches in Pricing

Based on customer

Answer 2

Value-Based - you think the welfare of customer

Question 3

3 Approaches in Pricing

Based on competitor

Answer 3

Going-Rate Pricing
- cost is equal to competitor’s price

Bidding
- lowest price among bidder

Target Costing
- selling price is known before product is developed

Question 4

Steps in Target Costing

4 steps

Answer 4

Step 1 : Determine the market price

Step 2 : Find the Target Cost (Market Price - Desired Profit)

Step 3 : Life cycle costs reduced to target cost by value engineering

Step 4 : Drop product if not attainable

Question 5

3 Approaches in Pricing

Based on cost (have a return of investment)

Answer 5

Cost-plus pricing
- certain cost + target profit

Mark-up pricing
- full cost + target % on cost or selling price

Question 6

Cost-plus Pricing

Absorption approach vs Contribution approach

Answer 6

Contribution approach
- all variable (even S&A expenses)