Page 259 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes 13.3.3 Rate of Return Pricing

For this type of pricing, the company needs to specify the rate of return on its capital invested.
Similar to Cost pricing, the difference is that the marked up will be based on the target rate of
return. The salient features include:

1. The target rate of return varies with market norm or what management considers a fair
return.
2. Useful method to use when a business has invested too much on the project or products.

3. However, difficult to use where a company has too many product lines or competes in
many markets.

Example: Capital invested/employed $2,000,000

Target return 10%
Estimated costs $500,000
10% × $2,000,000
Mark up =
$500,000
= 40%

13.3.4 Break-even Pricing

For this type of pricing, the price at which the products will break-even is used. This break-even

price will then be added a profit mark up.

Example: If Fixed Cost $25,000, Variable cost $2.00 per unit, Number of Units produced
4,000 and Mark-up is 15% on the break-even price, what will be selling price to the customers?

Solution:
Break-even price = Fixed Cost + Variable Cost/Marginal Cost
Total Number of units produced = $25,000 + $8,000
4,000 = $8.25 + mark up of 15% ($1.24)
= $9.50 which is the selling price to the customer.

13.3.5 Minimum Pricing

For this type of pricing, the selling price is the lowest price that a company may sell its product.
Normally, the price will be the Total Relevant Costs of Manufacturing. Its salient features include:
1. Useful method in situations where there is a lot of intense competition, surplus production
capacity, clearance of old stocks, getting special orders and or improving market share of
the product.
2. Minimum Price is Incremental costs of manufacturing + Opportunity Costs (if any),

Example: Assuming the following details of product X:
Material $2.50
Labor (2 hrs. @ $3.00) $6.00
Variable production overhead $2.50
Fixed production overhead $1.20

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