you have a distinguishable product and have some control over pricing
target costing formula
revenue at market price
-desired profit
-fixed costs
___________
- target total variable cost/ number of expected sales =
target variable cost per customer
use target costing when
when you have no control over price -- price taker
if a factory has idle capacity
do not include fixed manufacturing overhead (or any other fixed cost) or things like marketing costs in decision to take on a job because we would have paid for that regardless of taking the special order
incremental analysis /expected decrease in operating income formula if fixed expenses do not change
expected decrease in revenues
- expected decrease in variable expenses
incremenental analysis formula if fixed expenses changed
expected decrease in revenues
-( decrease in variable expenses+ decrease in fixed expenses)
if products incremental revenues exceeds incremental costs do not drop