2. 11 - 1 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show

3. 11 - 2 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Pricing Decisions Few management decisions are more important than setting prices.

4. Illustration 11-1 Pricing Factors

5. 11 - 4 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show How Are Most Prices Set? By the competitive market! In other words… Supply and Demand Used mainly for products that aren’t easily differentiated from competitive products

6. 11 - 5 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show When Can A Company Set the Price? How Are Most Prices Set?  When the product is specially made for a customer  When there are limited producers of similar items  Patented items  Copyrighted works  When a company can differentiate its product - STARBUCKS

7. 11 - 6 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Target Cost The cost that will provide the desired profit on a product when the seller does not have control over the product’s price. Competitive Market Pricing Price Set by Market$XXX Less:Desired Profit XX Target Cost $ XX Illustration 11-2

8. 11 - 7 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show After Target Cost Is Determined… A team of employees with expertise in:  Production  Operations  Marketing  Finance Assembles to:  Design and develop a product with quality specifications  While not exceeding costs

9. 11 - 8 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Target Cost Includes All: Competitive Market Pricing Price Set by Market$XXX Less:Desired Profit XX Target Cost $ XX PRODUCT COSTS –Direct Material –Direct Labor –Manufacturing Overhead PERIOD COSTS –Selling –Administrative necessary to: MAKE and MARKET the product.

10. 11 - 9 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Target Selling Price The selling price that will provide the desired profit on a product when the seller has the ability to determine the product’s price. Illustration 11-3

11. 11 - 10 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Target Selling Price The selling price that will provide the desired profit on a product when the seller has the ability to determine the product’s price. Illustration 11-3

12. 11 - 11 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Cost-Plus Pricing Advantage:  Easy to compute Disadvantages:  Doesn’t consider demand (Will the customer pay the price?)  Fixed cost per unit changes with change in volume

13. 11 - 12 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Markup The percentage applied to a product’s cost to determine the product’s selling price.

14. 11 - 13 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Time and Material Pricing An approach to cost-plus pricing in which the company uses two pricing rates: One for the labor used on a job One for the material.

15. 11 - 14 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Time and Material Pricing Used in service industries:  Public accounting firms  Law firms  Engineering, consulting firm  Construction companies  Repair shops  Printers

16. 11 - 15 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Material Loading Charge A charge added to cover the cost of :  Purchasing  Receiving  Handling  Storing Materials, plus any desired profit margin on the materials themselves.

17. 11 - 16 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Internal Sales - How do you price goods when they are “sold” within the company? Companies often expand in direction of its suppliers or customers.

18. 11 - 17 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Transfer Price The price used to record the transfer between two divisions of a company. Illustration 11-15

19. 11 - 18 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Transfer Price Approaches Negotiated transfer prices Cost-based transfer prices Market-based transfer prices

20. 11 - 19 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Negotiated Transfer Price A transfer price that is determined by the agreement of the division managers when no external market price is available.

21. 11 - 20 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Review – Opportunity Cost The potential benefit that may be obtained from following an alternate course of action.

22. 11 - 21 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Negotiated Transfer Price No Excess Capacity:Minimum Transfer Price Illustration 11-17

23. 11 - 22 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Negotiated Transfer Price No Excess Capacity: Illustration 11-17

24. 11 - 23 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Negotiated Transfer Price Excess Capacity:Minimum Transfer Price Illustration 11-19

25. 11 - 24 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Negotiated Transfer Price Excess Capacity: Illustration 11-20

26. 11 - 25 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Cost-Based Transfer Price A transfer price that uses as its foundation the costs incurred by the division producing the goods. Bad deal for division that is transferring.

27. 11 - 26 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Cost-Based Transfer Price Illustration 11-23

28. 11 - 27 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Market-Based Transfer Price A transfer price that is based on existing market prices of competing products.

29. 11 - 28 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Outsourcing Contracting with an external party to provide a good or service, rather than performing the work internally.

30. 11 - 29 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show Transfer Between Divisions in Different Countries Causes BIG tax problems- Let the CPAs handle it!

31. 11 - 30 Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based *Market-based Transferring Between Divisions Next Slide Previous Slide End Show