How Would A Manager Use Economic Theory To Determine The Profit-Maximizing Price For A Service Or Product?
Economic theory entails science that explains how to maximize a profit whenever products are sold, or services are offered. For the manufacturing company, this will be calculated from the cost of production up to when the marginal revenues levels with the marginal cost. Economic theory has this rule " if a firm chooses to maximize its profits, it must choose that level of output where Marginal Cost (MC) is equal to Marginal Revenue (MR), and the Marginal Cost curve is rising. In other words, it must produce at a level where MC = MR ( Nagle & Müller, 2017)." MC is the increase of the cost used to produce a product in large quantity. Marginal Revenue is described as total money collected change due to the change of rated per unit on the sales. Therefore the manager will have to increase the number of times he/she produces the product with the same rate of production.
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What Is The Process Of Target Costing? How Is The Target Cost Calculated?
Target costing is the method whereby the company plans earlier what the price point will be, the cost of the product and what will be the margins they want to achieve once the product reaches the market. To calculating the target cost when the margin of the product is based on the selling price, target cost will be calculated by multiplying the selling price of the product by the percentage profit. The result is subtracted from the selling price. “Target cost = selling price – profit percentage × selling price” For situation where the profit margins are based on product cost, their target cost can be calculated by the formula bellow (Cooper, 2017) .
Target
References
Cooper, R. (2017). Target costing and value engineering . Routledge.
Nagle, T. T., & Müller, G. (2017). The strategy and tactics of pricing: A guide to growing more profitably . Routledge.
