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Class 2 F 11 Student - PRICE COST ANALYSIS Part 1 Objective...

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1 PRICE / COST ANALYSIS Part 1 Objective – Explore Basic Techniques used to Analyze Costs of Purchased Materials and Services
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2 How do Companies assure that they get the best price for what they buy?
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3 Competitive Bidding Quality, Service, Delivery Capability, etc are equal Supplier B $0.85 / Unit Supplier C $1.11 / Unit Supplier A $0.90 / Unit What assurance does the buyer have from this approach?
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4 Goals of Price/Cost Management Develop accurate price/cost information to enhance negotiating effectiveness Drive continuous price/cost improvement Determine type of supplier relationship
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5 What are the elements of cost that make up the price of a product or service?
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6 Characteristics of Cost Elements Total FIXED COSTS Total Cost Examples of Fixed Costs CEO and other executive Salaries • R&D Budget Cost of Human Resources Dept. and other corporate support services • Sales and Marketing expenses • Building Rent and other lease payments Total Quantity
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7 Characteristics of Cost Elements FIXED COSTS PER UNIT Total Quantity Cost / Unit Once the second unit is produced, the fixed costs are allocated to both units. Therefore the “fixed cost per unit” that is allocated is cut in half. At 1 unit of production, all fixed costs are allocated to the single unit.
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8 Characteristics of Cost Elements TOTAL VARIABLE COSTS Total Cost Total Quantity If “variable cost / unit” is $1.00 and we produce 2 units, then total variable costs are $2.00. If “variable cost / unit” is $1.00 and we produce 1 unit, then total variable costs are $1.00.
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9 Characteristics of Cost Elements VARIABLE COSTS PER UNIT Total Quantity Cost / Unit Examples of Variable Costs Direct production labor • Direct Materials Fuel and power
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10 Revenue - Cost of Goods Sold Direct Labor Direct Material Factory Overhead - GS&A Costs - R&D Costs Profit before Taxes
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