Analysis of customer profitability, pricing choices, and activity-based pricing The manager would estimate the amount that could be sold at various prices. The quantities would then be multiplied by the contribution margin per unit, and fixed expenses would be subtracted from the total contribution margin to generate an estimate of profit at each price. The pricing that maximizes profit is the one that yields the highest profit. Based on the full cost per unit, the cost-plus pricing is determined. However, one must first estimate the quantity that can be sold in order to calculate the full cost per unit. But the price determines the amount that can be sold. Pricing determines the goal cost, and marketing personnel are required to decide on product features and pricing. Given the characteristics of the product, engineers are required to choose effective production techniques. Additionally, given the production process, cost accountants are required to estimate costs. A cross-functional team increases the possibility that a product will be put into production and can be manufactured for the target cost by assisting in ensuring good communication among these many parties. Indirect expenses are categorized into cost pools in customer profitability analysis (e.g., the cost pool for processing fax orders, the cost pool for processing Internet orders, the cost pool for shipping, etc.). In order to assess customer profitability, the expenses are subsequently distributed across the customers using different cost drivers (allocation bases). Customers are charged for a variety of services under activity-based pricing. For instance, there can be different fees for delivery, expedited orders, and returns. This will ensure that clients who demand high prices from a supplier pay for the services they receive. Setting the intended features and price for a product is the first step in the target costing process. The required profit must then be determined. To get to the target
cost, deduct the targeted profit from the projected price. Lastly, the product is created to adhere to the intended price. If there is surplus capacity, the variable cost should be the lowest special order price. It is important to predict the amount of products that will be purchased at each price point. To find the contribution margin, the price should be removed from the variable costs. The quantity demanded should then be multiplied by the contribution margin. The profit can then be determined by subtracting the fixed costs from the overall contribution margin.