Download chapter 13 part 2

Product Mix Decisions
 Product mix refers to the relative amount of each
product manufactured (or service provided) by a
company.
 Decisions about product mix can have a
significant impact on an organization’s
profitability.
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Product Mix Decisions (cont.)
 Every firm faces limited resources and limited
demand for each product. These limitations are
called constraints.
 A manager must choose the optimal mix given
the constraints found within the firm.
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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Determining the Optimal Product
Mix with One Constrained Resource
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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Multiple Constrained Resources
 The presence of only one constrained resource
might not be realistic.
 Organizations often face multiple constraints,
including:
 limitations of raw materials
 limitations of skilled labor
 limited demand for each product
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© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Multiple Constrained Resources
(cont.)
 The solution of the product mix problem in the
presence of multiple constraints is more
complicated and requires the use of a specialized
mathematical technique known as linear
programming, which is reserved for advanced
cost management courses.
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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Cost-Based Pricing
 Demand is one side of the pricing equation;
supply is the other side.
 They calculate product cost and add the desired
profit.
 The mechanics of this approach are
straightforward. Usually, there is a cost base and
a markup.
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© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Cost-Based Pricing (cont.)
 It includes desired profit and any costs not
included in the base cost.
 Companies that bid for jobs routinely base bid
price on cost.
 The markup is a percentage applied to the base
cost and is calculated as follows:
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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Calculating Price by Applying a
Markup Percentage to Cost
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© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Target-Costing and Pricing
 Many firms set the price of a new product as the
sum of the costs and the desired profit.
 The company must earn sufficient revenues to
cover all costs and yield a profit.
 Target costing is a method of determining the
cost of a product or service based on the price
(target price) that customers are willing to pay.
 The marketing department determines what
characteristics and price for a product are most
acceptable to consumers.
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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Target Cost
 Target cost is calculated:
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Calculating a Target Cost
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© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.