Explain what is Minimim Pricing Method in Pricing Decisions( Part 5)
In the earlier article, we have dealt with the importance of making the correct pricing decisions and the factors to consider before making a pricing decision.
This article refers to the various methods of pricing which include the following:
- Full Cost Plus pricing;
- Variable/Marginal Cost Plus pricing
- Rate of Return Pricing;
- Break-even Pricing;
- MINIMUM PRICING;
- Standard Cost Plus
Salient Points on Minimum Pricing: |
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Simple Illustration: |
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 Total $9.70 Say that the labor is in short supply and is used for other product Y which generates a contribution of $6 per unit and requires 2 hours of the same labor. Material $2.50 Labor $6.00 Variable production overhead $2.50 Add: Opportunity cost from labor scarcity: $6 / 2 hours= $3.00 per hr x 2 hr = $6.00 Minimum price = $17.00 |
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