56 7.8 Cost-Plus Pricing and Target Costing
Learning Objectives
- Understand how to use cost-plus pricing and target costing to establish prices.
The previous section focuses on using differential analysis to assess pricing for special orders. Organizations also use other approaches to establish prices, such as cost-plus pricing and target costing. We cover these two approaches next.
Cost-Plus Pricing
Questions: Companies that produce custom products, such as homes or landscaping for commercial buildings, often have a difficult time determining a reasonable market price. Prices for these products can be determined using cost-plus pricing. How is cost-plus pricing used to arrive at a reasonable price?
Target Costing
Question: Organizations are constantly trying to find ways to become more efficient and reduce costs. However, once manufacturing firms design a product and begin production, it is difficult to make significant changes that will reduce costs. How can target costing help with this issue?
Key Takeaway
Review problem 7.7
Suppose Nike, Inc., has developed a new shoe that can be sold for $140 a pair. Management requires a profit equal to 60 percent of the selling price. Determine the target cost of this product.
- Answer
Definitions
- An approach to establishing prices that starts with an estimate of the costs incurred to build a product, and a certain profit percentage is added to establish the price.
- An approach to pricing that integrates the product design, desired price, desired profit, and desired cost into one process beginning at the product development stage.
