Question

1.How would a manager use economic theory to determine profit-maximizing price for a service or product?

2. What is the process of target costing? How is target cost calculated?

Answer 1

1. The profit maximizing condition using economic theory are as follows:-

a) MC = MR

b) MC should be upward sloping.

The price at which both the conditions are satisfied is the profit maximizing price.

2. The process of target costing involves following steps:-

a) Determine the selling price using market research

b) Ascertain the cost by subtracting the profit from selling price.

c) Cost analysis of specific components and processes

d) Decide the estimated product cost.

e) compare the estimated and target cost.

f) if the estimated cost is more than target cost then repeat the process.

G) if estimated cost is equal to target cost then the production is performed.

Target cost is calculated based on the cost estimates. Target cost is calculated by using the formula

Target cost =( planned costs / planned output quantity) * actal output quantity.