{"showCoverPage":true,"bookCover":{"coverDescription":"

In a competitive product environment, the market determines the price.<\/h3>\n\n
Click through the pages to review the elements of this topic.<\/p>\n","coverMedium":{"params":{"decorative":true,"contentName":"Image","expandImage":"Expand Image","minimizeImage":"Minimize Image","title":"Photo by Mike Hindle on Unsplash","file":{"path":"images\/file-662fdb45a5b74.jpg","mime":"image\/jpeg","copyright":{"license":"U"},"width":6000,"height":4000}},"library":"H5P.Image 1.1","metadata":{"contentType":"Image","license":"U","title":"Untitled Image"},"subContentId":"56df3aa4-a014-47f5-bf5f-09eb38e23eeb"}},"chapters":[{"params":{"content":[{"content":{"params":{"text":"
Total Cost-Plus Pricing<\/strong><\/p>\n\n
In a competitive product environment, the market determines the price. The company thereby focuses on achieving the target cost to attain this profit they desire. However, not all products have a competitive environment and this provides a company with the capacity to set the product price, doing so in a manner that is relative to the cost of the product or service.   <\/p>\n\n
This process is referred to as total cost-plus pricing.  <\/p>\n\n
The makeup from the total cost required to produce and sell the product represents the desired profit, considering the size of the markup and generating the amount invested, the optimal markup that accounts for market conditions, issues that may arise and other relevant factors.  <\/p>\n\n
The cost pricing formula is outlined below: <\/p>\n\n
Cost    +    Markup Percentage x Cost     =   Target Selling Price <\/strong><\/p>\n\n
Determining Markup Amount based on a Desired ROI per Unit:  <\/em><\/p>\n\n
Management is evaluated on its ability to generate a high return on investment, which is expressed typically as a percentage (calculated as income divided by the average amount invested in a product or service). When the percentage is higher, this shows the company\u2019s ability to generate profits from the investment in a product \u2013 to achieve the desired ROI percentage, the product markup is determined by calculating the desired ROI per unit which is done by multiplying the desired ROI percentage by the amount invested to produce the product and dividing by the number of units produced (outlined in the calculation below): <\/p>\n\n
Desired ROI Percentage    x Amount Invested = Markup Units Produced      <\/strong><\/p>\n\n
Other companies may use the formula to calculate the markup percentage to achieve the desired ROI per unit. This calculation is below: <\/p>\n\n
Desired ROI per unit    \u00f7   Total Unit Cost      =      Markup Percentage <\/strong><\/p>\n\n
Additionally, the company may show the target selling price using the below calculation: <\/p>\n\n
Total Unit Cost +   (Total Unit Cost x Markup Percentage) = Target Selling Price Per Unit <\/strong><\/p>\n\n
There are limitations to the total cost-plus pricing approach, mainly that it does not consider the demand side of the equation and the challenge of determining the sales volume as it plays a massive role in determining the per-unit costs. If there are lower sales, the fixed costs would increase and therefore the higher the per unit price (spreading the fixed costs and ROI over fewer units). Alternatively, if the budgeted volume is higher the fixed costs and ROI can be spread over more units. If the sales volume is much less than the budgeted sales volume, the company will lose money unless it can raise its prices.  <\/p>\n\n
<\/p>\n"},"library":"H5P.AdvancedText 1.1","metadata":{"contentType":"Text","license":"U","title":"Untitled Text"},"subContentId":"20679882-623d-4a41-8efa-c86873bf474c"},"useSeparator":"auto"},{"content":{"params":{"text":"
All these elements are important to consider to set a competitive market value that ensures the price covers product costs, and will earn a reasonable profit that sustains the company. In most instances, the price is set by market forces and laws of supply and demand; however, there are instances where the company sets the price itself, whether it is: <\/p>\n\n
\n\t
\n\t
A one-of-a-kind product,  <\/p>\n\t<\/li>\n\t
\n\t
Limited number or no other producers make that item, or <\/p>\n\t<\/li>\n\t
\n\t
When a company has successfully distinguished their product from others.  <\/p>\n\t<\/li>\n<\/ul>\n\n
For the majority of companies that are influenced and informed by the competitive market, the one item that a company can focus on is controlling their costs: <\/p>\n\n
Market Price \u2013   Desired Profit = Target Cost <\/strong><\/p>\n\n
As the only element that a company has direct control over, this target cost is critical to ensure the desired profit is reached. In establishing and using the target cost, the company\u201d <\/p>\n\n
\n\t
\n\t
chooses the market segment it wants to compete in,  <\/p>\n\t<\/li>\n\t
\n\t
produces market research to determine product features and help to set the target price (amount that would place it affordable or targeted to relevant customers),  <\/p>\n\t<\/li>\n\t
\n\t
determine target cost by setting the profit desired (as the market research has informed what the target price\/market determined based on the above factors), and <\/p>\n\t<\/li>\n\t
\n\t
assembles subject matter experts to design and develop the product to meet the quality specifications within the confines of the target cost.  <\/p>\n\t<\/li>\n<\/ul>\n"},"library":"H5P.AdvancedText 1.1","metadata":{"contentType":"Text","license":"U","title":"Untitled Text"},"subContentId":"9cea56e3-7be4-40bb-bd65-fc02c98b8aea"},"useSeparator":"auto"}]},"library":"H5P.Column 1.18","metadata":{"contentType":"Column","license":"U","title":"Target Costing"},"subContentId":"2067f955-30e0-40e8-b0f1-403136be732b"},{"params":{"content":[{"content":{"params":{"text":"
To understand total cost-plus pricing and apply the identified calculations above, the case example of a sports company that sells high end snowboards. There are a number of elements required to determine the per unit variable cost. <\/p>\n"},"library":"H5P.AdvancedText 1.1","metadata":{"contentType":"Text","license":"U","title":"Untitled Text"},"subContentId":"8ed74319-7bd8-4f10-85cb-e4cbf8b04336"},"useSeparator":"auto"},{"content":{"params":{"text":"
\n\t\n\t\t\n\t\t\t
\n\t\t\t\n\t\t\t\tTotal cost-plus pricing\n\t\t\t\t\n\t\t\t\t\t\n\t\t\t\t\t\t\n\t\t\t\t\t\t\n\t\t\t\t\t\t\n\t\t\t\t\t\t\n\t\t\t\t\t\t\n\t\t\t\t\t\t\n\t<\/tbody>\n<\/table>\n"},"library":"H5P.Table 1.2","metadata":{"contentType":"Table","license":"U","title":"Untitled Table"},"subContentId":"51373547-0876-4a5c-ba46-e358e442048c"},"useSeparator":"auto"},{"content":{"params":{"text":"
To produce snowboards, there is a fixed manufacturing overhead of $250,000, with fixed selling and administrative expenses of $520,000. As it is a luxury brand and not all people snowboard, the company assumes the production of 2,000 units. <\/p>\n"},"library":"H5P.AdvancedText 1.1","metadata":{"contentType":"Text","license":"U","title":"Untitled Text"},"subContentId":"406b3122-733c-4820-bd89-0b4e323601a9"},"useSeparator":"auto"},{"content":{"params":{"text":"
<\/td>\n\t\t\t\t\t\t Per Unit<\/td>\n\t\t\t\t\t<\/tr>\n\t\t\t\t\t
Direct Materials <\/td>\n\t\t\t\t\t\t 123<\/td>\n\t\t\t\t\t<\/tr>\n\t\t\t\t\t
Direct Labour <\/td>\n\t\t\t\t\t\t 117<\/td>\n\t\t\t\t\t<\/tr>\n\t\t\t\t\t
Variable Manufacturing Overhead <\/td>\n\t\t\t\t\t\t 112<\/td>\n\t\t\t\t\t<\/tr>\n\t\t\t\t\t
Variable Selling and Administrative Expenses <\/td>\n\t\t\t\t\t\t 18<\/td>\n\t\t\t\t\t<\/tr>\n\t\t\t\t\t
Variable Cost Per Unit <\/td>\n\t\t\t\t\t\t 370<\/td>\n\t\t\t\t\t<\/tr>\n\t\t\t\t<\/tbody>\n\t\t\t<\/table>\n\t\t\t<\/th>\n\t\t\t <\/th>\n\t\t<\/tr>\n\t<\/thead>\n\t
\n\t\n\t\t\n\t\t\t\n\t\t\t\n\t\t\t\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\t \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\tTotal Costs\/Budgeted Volume <\/strong>\n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\tCost Per Unit <\/strong>\n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t<\/tr>\n\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\tFixed Manufacturing Overhead \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\t 250,000          \/        2,000 \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\t125 \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t<\/tr>\n\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\tFixed Selling and Administrative Expenses \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\t500,000          \/         2,000 \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\t250 \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t<\/tr>\n\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\tFixed Cost \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\t \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\t$375 \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t<\/tr>\n\t<\/tbody>\n<\/table>\n"},"library":"H5P.Table 1.2","metadata":{"contentType":"Table","license":"U","title":"Table"},"subContentId":"c0813ff3-5454-47e1-aeed-1cc0e72ccd93"},"useSeparator":"auto"},{"content":{"params":{"text":"
In reviewing the company\u2019s objective, assume the company desires a 25% ROI and that it has invested $2 Million. The markup would be around $250 based on the desired ROI <\/p>\n\n
25 %     x    $2,000,0000     =   $250 <\/p>\n\n
       2,000 units <\/p>\n"},"library":"H5P.AdvancedText 1.1","metadata":{"contentType":"Text","license":"U","title":"Untitled Text"},"subContentId":"1f7d5062-cf47-4174-9582-d2ae28713729"},"useSeparator":"auto"},{"content":{"params":{"text":"
\n\t\n\t\t\n\t\t\t\n\t\t\t\n\t\t\t\n\t\t\t\n\t\t\t\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\t \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\tPer Unit <\/strong>\n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t<\/tr>\n\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\tVariable Cost \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\t370 \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t<\/tr>\n\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\tFixed Cost \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\t375 \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t<\/tr>\n\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\tTotal Cost \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\t745 \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t<\/tr>\n\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\tDesired ROI \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\t250 \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t<\/tr>\n\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\tSelling price per unit \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t\t
\n\t\t\t
\n\t\t\t
\n\t\t\t$995 \n\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/td>\n\t\t<\/tr>\n\t<\/tbody>\n<\/table>\n"},"library":"H5P.Table 1.2","metadata":{"contentType":"Table","license":"U","title":"Table"},"subContentId":"b45b9a14-8b02-4087-be96-1aa27274a5b8"},"useSeparator":"auto"},{"content":{"params":{"text":"
To determine the markup percentage, the desired ROI per unit will need to be divided by the total unit cost to determine the markup percentage: <\/p>\n\n
250 \u00f7 745 = 33.56 % <\/p>\n\n
To calculate the target selling price per unit, the formula is applied below:  <\/p>\n\n
745 + (745 x 33.56%) = $995 <\/p>\n\n
Therefore, the sports company should set their luxury snowboards at $995 per unit.  <\/p>\n"},"library":"H5P.AdvancedText 1.1","metadata":{"contentType":"Text","license":"U","title":"Untitled Text"},"subContentId":"188c3ccf-3fd0-4f55-8813-8bf01e608a58"},"useSeparator":"auto"}]},"library":"H5P.Column 1.18","subContentId":"cda942d6-cbca-43c5-ab2b-89c3a0b34cfa","metadata":{"contentType":"Column","license":"U","title":"Case Example"}},{"params":{"content":[{"content":{"params":{"media":{"disableImageZooming":false},"taskDescription":"Drag the words into the correct boxes","overallFeedback":[{"from":0,"to":100}],"checkAnswer":"Check","submitAnswer":"Submit","tryAgain":"Retry","showSolution":"Show solution","dropZoneIndex":"Drop Zone @index.","empty":"Drop Zone @index is empty.","contains":"Drop Zone @index contains draggable @draggable.","ariaDraggableIndex":"@index of @count draggables.","tipLabel":"Show tip","correctText":"Correct!","incorrectText":"Incorrect!","resetDropTitle":"Reset drop","resetDropDescription":"Are you sure you want to reset this drop zone?","grabbed":"Draggable is grabbed.","cancelledDragging":"Cancelled dragging.","correctAnswer":"Correct answer:","feedbackHeader":"Feedback","behaviour":{"enableRetry":true,"enableSolutionsButton":true,"enableCheckButton":true,"instantFeedback":false},"scoreBarLabel":"You got :num out of :total points","a11yCheck":"Check the answers. The responses will be marked as correct, incorrect, or unanswered.","a11yShowSolution":"Show the solution. The task will be marked with its correct solution.","a11yRetry":"Retry the task. Reset all responses and start the task over again.","textField":"In a competitive product environment, the market determines the price. The company thereby focuses on achieving the target cost to attain this profit they desire. However, not all products have a competitive environment and this provides a company with the capacity to set the product price, doing so in a manner that is relative to the cost of the product or service."},"library":"H5P.DragText 1.10","metadata":{"contentType":"Drag the Words","license":"U","title":"Drag the Words"},"subContentId":"ec06dc17-1c8d-40ae-ac05-75a344deaacf"},"useSeparator":"auto"}]},"library":"H5P.Column 1.18","metadata":{"contentType":"Column","license":"U","title":"Check for Understanding"},"subContentId":"7c7cf0f1-e206-47c4-bffd-de9329a7f03d"}],"behaviour":{"baseColor":"#1768c4","defaultTableOfContents":true,"progressIndicators":true,"progressAuto":true,"displaySummary":true,"enableRetry":true},"read":"Read","displayTOC":"Display 'Table of contents'","hideTOC":"Hide 'Table of contents'","nextPage":"Next page","previousPage":"Previous page","chapterCompleted":"Page completed!","partCompleted":"@pages of @total completed","incompleteChapter":"Incomplete page","navigateToTop":"Navigate to the top","markAsFinished":"I have finished this page","fullscreen":"Fullscreen","exitFullscreen":"Exit fullscreen","bookProgressSubtext":"@count of @total pages","interactionsProgressSubtext":"@count of @total interactions","submitReport":"Submit Report","restartLabel":"Restart","summaryHeader":"Summary","allInteractions":"All interactions","unansweredInteractions":"Unanswered interactions","scoreText":"@score \/ @maxscore","leftOutOfTotalCompleted":"@left of @max interactions completed","noInteractions":"No interactions","score":"Score","summaryAndSubmit":"Summary & submit","noChapterInteractionBoldText":"You have not interacted with any pages.","noChapterInteractionText":"You have to interact with at least one page before you can see the summary.","yourAnswersAreSubmittedForReview":"Your answers are submitted for review!","bookProgress":"Book progress","interactionsProgress":"Interactions progress","totalScoreLabel":"Total score","a11y":{"progress":"Page @page of @total.","menu":"Toggle navigation menu"}}