Economic theory assumes that a firm can estimate a demand curve for its products; The basic model of economic theory assumes only price influences the quantity demanded; The marginal cost curve for each individual; The marginal cost curve for each individual product can only be determined after considerable analysis and the final result may only represent an approximation;
Extra materials that are required to fulfill the order; Extra labour and overhead costs; Any other extra costs; Given the short-term one-off nature of the opportunity many costs will be non-incremental.
1. Sufficient capacity must be available to meet the order 2. The bid price should not effect future selling prices and the customer should not expect repeat business at short-term incremental cost 3. The order will utilize unused capacity for only a short period and capacity will be released for use on more profitable opportunities.
In the long run firms can adjust the supply of virtually all of their activity recourses Product should be priced to cover all of the; Product should be priced to cover all of the resources that are committed to a product in the long run
Sufficient capacity is available for all resources that are required from undertaking the business; • The company will not commit itself to repeat longer-term; The company will not commit itself to repeat longer term business that is priced to cover only short-term incremental costs; The order will utilize unused capacity for only a short period and capacity will be released for use on more profitable opportunities
Under the total cost concept, all costs of manufacturing a product plus the selling and 1) Total Cost Concept selling and administrative expenses are included in the total cost to which the markup is added.
Under the product cost concept, only the costs of manufacturing the product, termed the product costs, are included in the cost amount per unit to which the cost amount per unit to which the markup is added.
Ignores demand; Does not necessarily ensure that total sales revenue will exceed total cost.; Can lead to wrong decisions if budgeted activity is used to unitize costs.; Circular reasoning —Volume estimates are required to estimate unit fixed costs and ultimately price.
1. May encourage price stability; 2. Demand can be taken into account by adjusting the target mark-ups; 3. Simplicity; 4. Difficulty in applying sophisticated procedures where a firm markets hundreds of products/services; 5. Used as a guidance to setting the price but other factors are also taken into account; 6. Applied to only the relatively minor revenue items
Target costing is a method of setting prices that combines market-based pricing with a cost-reduction emphasis. A future selling price is anticipated, using the selling price is anticipated, using the demand-based or the competition-based methods
It is the difference between the differential revenue and the differential costs. Differential income indicates that a decision is expected to be profitable, while a differential loss indicates the opposite.