Both formats for pricing exhibit 5 12 p216 showed the

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Unformatted text preview: short-run versus long-run effects 5. of cutting prices on special orders. of Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Advantages of Absorption­Cost Approaches 1. In the long run, a firm must recover all costs to stay in business. 2. It may indicate what competitors might charge. 3. It meets the cost­benefit test. 4. It copes with uncertainty. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Advantages of Absorption­Cost Approaches 5. It tends to promote price stability. 6. It provides the most defensible basis for justifying prices to all interested parties. 7. It simplifies pricing decisions. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Using multiple approaches No single method of pricing is always best. Companies often use No both full-cost and variable cost information in pricing decisions. both Formats for pricing: Exhibit 5-12, p.216 showed the maximum price and minimum Exhibit price, and any amount you get above the minimum price is a contribution margin or desired markup. The minimum price is the total variable cost (both manufacturing and nonmanufacturing). The exhibit combines direct labor and variable Manufacturing overhead. It lumps together all fixed costs, whether manufacturing, selling, or administrative, and applies them to the job using a single fixed overhead rate per direct labor hour. direct Some managers compile separate categories of costs of 1) direct Some materials, parts and supplies 2) direct labor. The managers then use different markup rates for each categories. They use these rates to provide enough revenue to cover both indirect and unallocated costs and operating profit. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh For example, an automobile repair shop might have the For following format for each job: following Billed to customers Billed $280 Auto parts ($200 cost plus 40% markup) Direct labor (cost is $20/hour. Bill at 300% to recover indirect and unallocated costs to and provide for operating profit. Billing rate and is $20X300% = $60/hour. Total billed for 10 hours is is $60X10 hours = $600) Total billed to customer Total Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh...
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