3 Joint Product Pricing Let us take the case of a dairy product manufacturing

3 joint product pricing let us take the case of a

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3. Joint Product Pricing Let us take the case of a dairy product manufacturing unit that buys raw milk and sells the same as liquid milk, skimmed milk powder, butter and ghee. A look at the process would show that liquid milk would have to be boiled to get the cream which when removed will leave skimmed milk, which can be further processed to get skimmed milk powder. The cream again after processing may give butter, which again after processing would yield ghee. Let us take a situation where the dairy buys 1000 liters of liquid milk at Rs. 15 per liter. This milk after heating and processing gives125 kg of cream and 750 liters of skimmed milk. The 750 litres of skimmed milk after boiling/heating and drying may give 100 kgs of skimmed milk powder and the 125 kg of cream may give 65 kg of butter. Now if the cost of 1000 litres of liquid milk was to be apportioned – to the 2 end products viz skimmed milk powder and butter in terms of their proportion of use we would have calculated as under- Cost of 1000 liters of milk @ Rs. 15 per liter = Rs. 15000.00 82
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PRICING If the cost of heating/boiling 1000 liters of liquid milk is Rs. 800 Rs. 800.00 For 1000 litres of milk Rs. 15800.00 The next step we find 1000 liters of liquid milk yields 750 litres of skimmed milk and 125 kg of cream. Thus Rs. 15800 should be apportioned to 750 litres skimmed milk ingredient = Rs. 13542 (Rs. 15800/875 *750) 125 kgs butter ingredient = Rs. 2257 (Rs. 15800/875 *125) But if we were to do that, then the ultimate cost of the 100 kg of skimmed milk powder would have to bear a material cost of Rs. 13542, i.e., Rs. 135.42 per kg. and 65 kg of butter would similarly end up with an allocated material cost of Rs. 2257, i.e., Rs. 34 per kg. It would be evident that the skimmed milk powder with such an initial cost load would become quite unmarketable. But if we take cognisance of the likely market price of the two products, say skimmed milk powder at Rs. 200/kg and butter at Rs. 210/kg then the cost of Rs. 15800 can get apportioned as 210 *65 = 13560 -------- Butter 200* 100 = 20000 -------- Skimmed milk 33650 15800/33650 * 13650 = Rs. 6429 Butter 15850/33650 * 20000 = Rs. 9420 Skimmed milk Rs. 15850 83
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PRICING Here the apportionment has been made, factoring in the ultimate sale price of the finished product and thus butter gets a raw material cost apportionment now 6429.00 against the earlier apportioned amount of Rs. 2257.00. Whereas in the case of skimmed milk powder the new apportioned amount is Rs. 9420.00 against the earlier higher amount of Rs. 13542.00, which makes the skimmed milk powder a more workable proposition now. 4. Return on Investment Based Pricing An organisation may decide to have a return on investment objective, when deciding the price. Of course even then they would have to refer back to the market to check whether the market would be willing to buy at that price and if not, change the return expectation. Let us see how the method works through an example. A company manufacture and sells a bathing soap. The cost of the ingredients are – Raw material per cake of soap Rs. 6.00 Packing material per cake of soap Rs. 6.00 Labour incurred per cake of soap Rs. 2.00 Rs. 14.00 The factory where the soap is manufactured has a fixed overheads burden of Rs. 2,40,000 per month. The investment in various fixed assets of the
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