Tài liệu tiếng Anh thương mại quản lý Chapter 14 Price and cost analysis

Tài liệu tiếng Anh thương mại quản lý Chapter 14 Price and cost analysis

Chapter 14

Price and Cost

Analysis

Key Concepts

» Competitive Price Proposals

» Regulated, Catalog, and Market Prices

» Internet/e-Procurement

» Historical Prices

» Independent Cost Estimates

» Cumulative Curve and the Unit Curve

» Target Cost Estimation

• Obtaining materials at the right price can

be a firm’s success or failure

• Price or acquisition cost, is largest

component of total cost

• Right price, a fair and reasonable price to both the buyer and the seller

• no magic formula for calculating

• The right price is not equal for all

suppliers

General Economic Considerations

Area of Imperfect Competition

Monopolistic

Variable-Margin Pricing

• Frequent in suppliers that sell a line of

products

• Pricing is based on whole line

are too high

• Some prices are also artificially low

Product Differentiation

• Undifferentiated: not distinguished by

specific differences

• Differentiated: products appear different

from those of their competitors

Six Categories of Cost

Costs

» Examples: Maintenance, Utilities and Postage

» Sum of variable, fixed and semi variable costs

Cost, Volume, Profit Relationships

Figure 14-1

Regulation by Competition

determine the exact price each firm will

quote

• That is, when faced with the realities of

competition, the price any specific firm

will quote will be governed largely by its

need for business and by what it thinks its competitors will quote, not by costs or

profits

• A firm tends to seek the highest price that

is compatible with its long-range goals

Long versus Short Run Considerations

• In the long run, a firm must recover all

costs or go out of business

» Plant and machinery must be maintained,

modernized, and replaced

• In the short run, a firm should recover

variable costs and some portion of

overhead rather than undergo a significant decline in business

» Unless such additional business would affect the pricing of current or future orders

Price Analysis

• Regulated, catalog, or market prices

• Internet / e-procurement

• Comparison with historical prices

Competitive Price Proposals

• At least two qualified sources have

responded

buying firm’s requirements

the award

• The supplier submitting the lowest offer

does not have an unfair advan tage over its competitors

Regulated, Catalog, and Market Prices

Internet / e-Procurement

Internet allows supply management

personnel to view up-to-date pricing

• Since the Internet does not have

geographical constraints, the information

Historical Prices

• Were there one-time engineering, setup, or tooling charges in the original price?

• What should be the effect of inflation or

deflation on the price?

situation in which the supplier should

enjoy the benefits of learning?

Independent Cost Estimates

as a basis for comparison of prices

are available

independent cost estimate should be “fair and reasonable”

Cost Analysis

» Price analysis is impractical

» Or price analysis does not allow a buyer to

reach the conclusion that a price is fair and

reasonable

• Cost analysis is generally most useful

when purchasing nonstandard items and

services

Cost Analysis Defined

• Cost analysis is a review and an

evaluation of actual or anticipated costs

» It involves the application of experience,

knowledge, and judgment to data in an attempt

to project reasonable estimated contract costs

• The purpose is to arrive at a price that is

fair and reasonable to both the buying and selling firms

Elements Affecting Cost

• Efficiency of labor

• Plant capacity and the continuity of output

How Production Volume Affects Fixed Costs,

Variable Costs and Profit

Table 14-1

Sources of Cost Data

1 Potential suppliers as a precondition of

submitting proposals and bids

developed preferred or strategic supplier relationships

Example of a Typical Request for a Cost

Breakdown

Figure 14-2

Direct Costs

• Direct costs are normally the major

portion of product or service costs

• They are usually easily traceable

• They generally serve as the basis for

allocation of supplier overhead costs

• A tiny reduction here is worth more to the buying firm than a major reduction in the

percentage of profit

Direct Costs and Prices

Table 14-3

Tooling Costs

• Several benefits exist when a buying firm pays for and takes title to special tooling:

» The buying firm gains greater control

» Analysis of production costs is easier

– Labor learning curve effect is reduced

» Tooling can be moved if needed

Learning Curves

observation that the unit cost of a new

product decreases as more units of the

product are made because of the learning process

• In other words, a learning curve is an

empirical relationship between the number

of units produced and the number of labor hours required to produce them

Uses of Learning Curves

Schedules

Two Types of Learning Curves

» Commonly used in price and cost analysis

» Plots cumulative units produced against the

average direct labor cost or average labor

hours required per unit for all units produced

• Unit or marginal cost curve

» Used in labor and cost-estimating work

» Plots cumulative units produced against the

actual labor hours required to produce each

unit

Comparison of a Cumulative Average Learning

Curve and a Unit Learning Curve

Figure 14-3

A 90% Cumulative Average Learning Curve,

Plotted on an Arithmetic Grid

Table 14-4

The 90% Cumulative Average Learning Curve,

Plotted on Log-Log Grid

Ninety Percent Cumulative

Learning Curve Data

Cumulative Average labor Unit Labor hours labor hours hours required

produced required required per unit

1st 100 100 100.0 2nd 80 180 90.0 3rd 74 254 84.7

4th 70 324 81.0

Problems with Learning Curve Applications

Cumulative Average Curve Example

of a specially designed component at

$2,000 per unit

• Of the $2,000 selling price, $1,000

represents direct labor

• An audit of product costs for the first 50

units established the operation is subject

to an 80 percent cumulative average

learning curve

Graphing the Learning Curve

• All we need are two points to graph a line

on a log-log grid

• Point #1: Average cost of 1st 50 was

$1,000 each (this was given)

» giving the point (50 , $1000)

• Point #2: Average cost of the 1st 100

according to the 80% curve is:

» .8 x $1,000 = $800

» giving the point (100, 800)

Estimating Labor Cost for the New Contract

• Next, we need the direct labor cost for

the follow-on order of 350 units:

» 400 X $510 = $204,000

» 50 X $1,000 = $50,000

» $204,000 - $50,000 = $154,000

» $154,000 / 350 = $440 per unit labor cost

» Quite a difference from $1,000!

Cumulative Average Curve Example

• Now determine the cost for materials,

overhead, and profit on the 350 units

• Add this figure to the labor cost to obtain

the total price ABC should pay for the

additional 350 units

Cumulative Average Curve Example

Unit Learning Curve Example

to produce 515 units of a new product

manager to believe that a unit learning

curve will be experienced

The Manufacturer’s Production Data

Column 1 Column 2 Column 3

Labor hours required as UnitLabor required to produce the a % of those required

produced corresponding unit in col 1 for the preceding unit

Unit Learning Curve Example

manager concludes that approximately an 85% unit learning curve effect exists.

Recovering Indirect Costs

• A supply professional must understand how the supplier estimates and applies overhead

• Many suppliers use outdated overhead allocation methods that no longer reflect the true costs of

the products they produce and sell

• A small error in estimating and applying

overhead can significantly affect the final cost

• A supply professional should motivate a selling

firm with poor cost control to improve its system

of collecting and applying costs to products

Activity Based Costing

• Improves the tracing of costs to the

product or service that consumed the cost

• Usually, these costs were arbitrarily

allocated in the past using a volume based driver, such as direct labor

• ABC identifies the true (or more logical)

drivers of indirect costs

of orders, length of setups, engineering

changes

Target Costing

• Target costing focuses on the price the

customer will be willing to pay for a

product or service

» After removing a reasonable profit from the

price, the target cost is identified

» Designers can then focus on meeting the

needs of the customer within the target cost

constraint

costing to analyses of supplier’s products and services

• Profit is the basic reward for risk taking as well as the reward for efficiency

• A higher profit per unit is generally

justified for small special orders

• Products and services requiring highly

technical personnel usually require higher profit

• A higher profit is generally justified for a

firm that repeatedly turns out superbly

reliable technical products

factors may force a firm to sell its

products at a loss

• A firm that incurs the risk of

manufacturing to its own design is entitled

to higher profit than one that does not

The Fixed Percentage Problem

• Supplier profit should not be based on a

fixed percentage of the supplier’s cost

» Suppose an inefficient supplier has costs of

$1,500 per unit, while an efficient supplier has costs of $1,000 per unit

» If a 10% profit is awarded to a supplier, then

the inefficient supplier would receive $150 per unit profit, while the efficient supplier would

receive only $100

Concluding Remarks

• The right price is one of supply

management’s most important

responsibilities

analyzed

Concluding Remarks

• When price analysis is not possible, cost

analysis becomes the basis of obtaining a fair and reasonable price

often reside in overhead

understanding of costs, cost systems, and overhead composition and allocation

END