In this chapter you will learn: Capital expenditure decisions, the capital expenditure approval process, techniques for analysing capital expenditure projects, other issues in capital expenditure analysis, income taxes and capital expenditure analysis, investments in advanced technologies, post-completion audits, the limitations of capital expenditure analysis. | Lecture 23: Cost-Based Decision making (Pricing) 2 The price of a good or service is affected by many factors. 3 Regardless of the factors involved, the price must cover the costs of the good or service as well as earn a reasonable profit. Pricing Goods for External Sales The price of a good or service is affected by many factors. Company must have a good understanding of market forces. Where products are not easily differentiated from competitor goods, prices are not set by the company, but rather by the laws of supply and demand – such companies are called price takers. Where products are unique or clearly distinguishable from competitor goods, prices are set by the company. 4 Pricing Goods for External Sales 5 Laws of supply and demand significantly affect product price. To earn a profit, companies must focus on controlling costs. Requires setting a target cost that will provide the company’s desired profit. 6 Target Costing Pricing Goods for External Sales Target cost: Cost that provides the desired profit when the market determines a product’s price. 7 If a company can produce its product for the target cost or less, it will meet its profit goal. Pricing Goods for External Sales Target Costing First, company should identify its market niche where it wants to compete. Second, company conducts market research to determine the target price – the price the company believes will place it in the optimal position for the target consumers. Third, company determines its target cost by setting a desired profit. Last, company assembles a team to develop a product to meet the company’s goals. 8 Pricing Goods for External Sales Target Costing The desired profit for this new product line is $1,000,000 x 25% = $250,000 Each cover must result in profit of $250,000 ÷ 200,000 units = $ Market price Desired profit Target cost per unit $20 $ $ per unit Fine Line Phones is considering introducing a fashion cover for its phones. Market research indicates that 200,000 . | Lecture 23: Cost-Based Decision making (Pricing) 2 The price of a good or service is affected by many factors. 3 Regardless of the factors involved, the price must cover the costs of the good or service as well as earn a reasonable profit. Pricing Goods for External Sales The price of a good or service is affected by many factors. Company must have a good understanding of market forces. Where products are not easily differentiated from competitor goods, prices are not set by the company, but rather by the laws of supply and demand – such companies are called price takers. Where products are unique or clearly distinguishable from competitor goods, prices are set by the company. 4 Pricing Goods for External Sales 5 Laws of supply and demand significantly affect product price. To earn a profit, companies must focus on controlling costs. Requires setting a target cost that will provide the company’s desired profit. 6 Target Costing Pricing Goods for External Sales Target cost: Cost that .
