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Appendix A-2
Learning Objective 1
Elasticity of Demand
Change Change
in versus in Unit
Price Sales
Appendix A-4
4
ln(1 + (-0.15))
d =
ln(1 + (0.10))
ln(0.85)
d = = -1.71
ln(1.10)
Appendix A-10
10
ln(1 + (-0.20))
d =
ln(1 + (0.10))
ln(0.80)
d = = -2.34
ln(1.10)
Appendix A-11
11
Profit-maximizing -1.71
markup = - 1 = 1.41 or 141%
on variable cost -1.71 +1
Appendix A-14
14
Profit-maximizing -2.34
markup = - 1 = 0.75 or 75%
on variable cost -2.34 +1
Appendix A-15
15
Learning Objective 2
Markup %
(Required ROI Investment) + S & A expenses
on absorption = Unit sales Unit product cost
cost
Lets
Lets assume
assume that
that Ritter
Ritter must
must invest
invest $100,000
$100,000 in
in the
the
product
product and
and market
market 10,000
10,000 units
units of
of product
product each
each
year.
year. The
The company
company requires
requires aa 20
20 percent
percent ROI
ROI on
on all
all
investments.
investments. Lets
Lets determine
determine Ritters
Ritters markup
markup
percentage
percentage onon absorption
absorption cost.
cost.
Appendix A-26
26
Markup %
on absorption = (20% $100,000) + ($2 10,000 + $60,000)
cost 10,000 $20
Variable SG&A per unit Total fixed SG&A
Markup %
($20,000 + $80,000)
on absorption = $200,000 = 50%
cost
Appendix A-27
27
Absorption
Absorption costing
costing approach
approach to
to pricing
pricing is
is aa safe
safe
approach
approach only
only ifif customers
customers choose
choose toto buy
buy atat
least
least as
as many
many units
units asas managers
managers forecasted
forecasted
they
they would
would buy.
buy.
Appendix A-30
Learning Objective 3
Target Costing
Target costing is the process of determining the
maximum allowable cost for a new product and then
developing a prototype that can be made for that
maximum target cost figure. The equation for
determining a target price is shown below:
Target
Target cost
cost == Anticipated
Anticipated selling
selling price
price Desired
Desired profit
profit
Once the target cost is determined, the
product development team is given the
responsibility of designing the product
so that it can be made for no more than
the target cost.
Appendix A-32
32
Target
Target costing
costing was
was developed
developed in
in recognition
recognition
of
of the
the two
two characteristics
characteristics summarized
summarized onon
the
the previous
previous screen.
screen.
Target
Target costing
costing begins
begins the
the product
product development
development
process
process by
by recognizing
recognizing and
and responding
responding to
to
existing
existing market
market prices.
prices. Other
Other approaches
approaches
allow
allow engineers
engineers to
to design
design products
products without
without
considering
considering market
market prices.
prices.
Appendix A-34
34
Target Costing
Handy Appliance feels there is a niche for a
hand mixer with certain features. The
Marketing Department believes that a price of
$30 would be about right and that about
40,000 mixers could be sold. An investment of
$2,000,000 is required to gear up for
production. The company requires a 15
percent ROI on invested funds.
Let see how we determine the target cost.
Appendix A-36
36
Target Costing
End of Appendix A