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Husseinkhasharmeh drhusseinkhasharmeh exhibit510

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Unformatted text preview: rate a target return on investment). Cost bases for cost-plus pricing: The size of the “plus” depends on the definitions of cost and the target (desired) operating income. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Target Sales Price: Different ways used a cost as a bases to reach target price: 1. as a percentage of variable manufacturing costs See exhibit 5­10, p. 213: Mark up (%) = 20­12 = 66.67% 12 2. as a percentage of total variable costs Mark up (%) = 20 – 13.1 = 52.67% 13.1 3. as a percentage of full costs Mark up (%) = 20 – 19 = 5.26% 19 4. as a percentage of total manufacturing cost Mark up = 20 – (12+3) = 33.33% 15 Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Exhibit 5­10 Relationships of Costs to Same Target Selling Prices arget sales price Target sales price Variable costs: Alternative Markup Percentage to Achieve Same Target Sales Price $20.00 1) Manufacturing $12.00 ($20.00 – $12.00) ÷ $12.00 = 66.67% (1) Manufacturing Selling and administrative 1.10 2) Unit variable cost 13.10 ($20.00 – $13.10) ÷ $13.10 = 52.67% (2) Unit variable cost ixed costs: Fixed costs: Manufacturing $ 3.00 Selling and administrative 2.90 nit fixed costs 5.90 Unit fixed costs 3) Full Costs $19.00 ($20.00 – $19.00) ÷ $19.00 = 5.26% (3) Full Costs arget operating income Target operating income $ 1.00 Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Advantages of Contribution Margin Approach in cost­plus pricing 1. The contribution margin approach offers more detailed 1. information because it displays variable and fixed cost behavior patterns separately. behavior 2. This approach is sensitive to cost-volume-profit 2. relationships, it is a helpful basis for developing pricing formulas. formulas. 3.This approach allows managers to prepare price 3.This schedules at different volume levels. schedules 4. It helps managers to display the interrelationships among 4. variable costs, fixed costs, and potential changes in selling prices. selling 5. It offers insight into the...
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