 We've spent a lot of time in managerial accounting talking about costs, so let's switch our focus for a moment to price. There are a number of factors that affect a product's price, but the basics of pricing comes from ECON 101. Supply curves and demand curves intersect at the market price of a product. In addition to demand factors, other factors include pricing goals like lowering pricing to increase market share or cost considerations like can we reduce cost to have a more competitive price. Regardless of the factors involved, the price must cover the cost of goods or services as well as earn a reasonable profit. When it comes to pricing decisions, companies tend to fall into one of two categories. Price takers are companies whose products are not easily differentiated from competitors' goods. Prices are not set by the company, but rather by the laws of supply and demand. Most companies are price takers in a market economy. This is why Coca-Cola and Pepsi are priced so similarly. If one was priced much higher than the other, few would buy it. This is not true of price setters, however. Price setters are companies whose products are unique and clearly distinguishable from competitors' goods. Therefore, price setters can set high prices for their unique goods. Since price takers don't have control over market price, they have to focus on controlling costs. Target costing is the difference between the market price and a reasonable desired profit. All of the costs incurred within the value chain to produce and sell a product are included in the target cost. When actual costs are less than target costs, a company can produce and sell the product. However, when actual costs are higher than target costs, a company must make some changes before selling its products. Let's look at an example. The talking heads are price takers and have a desired profit on a newly released single of $10,000. They have discretionary fixed costs related to album marketing of $25,000. All other costs cannot be changed. Target costing analysis shows that the target cost is less than the actual cost. So the talking heads would either need to accept a lower desired profit and or cut discretionary fixed costs. Price setters use a cost plus pricing rather than target costing. Cost plus pricing starts with the full product cost and adds the desired profit. Let's look at this example. The talking heads are price setters and have a desired profit on a newly released single of $10,000. Their costs related to the singles are shown on the slide. With their full product cost and desired profit, they want to earn a total revenue of $135,000. If they intend to sell 500 copies, then the cost plus price is $270 per unit.