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Suppl_note_re_Pricingl_05 - CMA2 Pricing Supplementary...

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CMA2 - Pricing - Supplementary Notes A. Market-based Approach Target Costing -Under the approach, you start with an assumption about the price the market will bear for a certain product; you then subtract your desired profit (based on your required investment and desired company ROI); This leaves you with the target cost which is the maximum cost your require from your production people. Anticipated SP $ xxxx Less: Desired profit xxxx Target cost $ xxxx The target cost can consist of just the manufacturing cost or a combination of mfg. cost and selling & administrative costs. If the only the manufacturing cost is to be included in the target cost, then a share of selling & administrative cost is usually subtracted from the anticipated selling price (in addition to desired profit). In order to reduce the target cost, the company has three options: 1) Reduce desired ROI (accept less profit on the required investment) 2) Reduce the selling expenses related to the order (e.g. less sales commission) 3)
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