How to calculate target return price for product?
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Target return pricing is the pricing policy where the firm determines the price that yields its target rate of return on investment.
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The target return price can be calculated as:
Target return price = unit cost + (desired return * invested capital) / unit sales
Here, the desired return is the desired return on investment, also known as ROI. The ROI can be calculated as = (Gain from investment – cost of investment)/ cost of investment.
The product of desired rate of return and the capital invested gives the required total return. Adding the return per unit required with the unit cost gives the target return price.
Pricing products in such a manner has certain disadvantages. This method does not take into account price elasticity and competitor’s prices. The manufacturer needs to consider different prices and estimate their probable impact on sales volume and profits.
Read NextTarget CostingTarget MarketTarget MarketingTargeted Amortization ClassTarget Population
The target return price can be calculated as:
Target return price = unit cost + (desired return * invested capital) / unit sales
Here, the desired return is the desired return on investment, also known as ROI. The ROI can be calculated as = (Gain from investment – cost of investment)/ cost of investment.
The product of desired rate of return and the capital invested gives the required total return. Adding the return per unit required with the unit cost gives the target return price.
Pricing products in such a manner has certain disadvantages. This method does not take into account price elasticity and competitor’s prices. The manufacturer needs to consider different prices and estimate their probable impact on sales volume and profits.
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