Question

Discuss both the full-cost pricing strategy and the marginal-cost pricing strategy and explain how each would apply to your health care clinic. How would target costing affect your business?

Answer 1

Full cost pricing permits businesses to recover all costs including both fixed and variable cost, while marginal cost pricing recovers only variable costs. Full cost pricing is when a provider sets a price to cover costs plus extra to make a profit. Marginal cost is setting prices that only cover marginal costs. The essential difference is that Full Cost Pricing makes a profit while Marginal Cost does not make profit.

If a health service organization set its prices to full costs, that organization would be financially healthy. IT would be charging enough to cover both its variable and fixed costs. If a health service organization set its prices to marginal costs that organization would only make enough money to cover its variable costs. In the long run this technique would bankrupt the company. This technique can be used occasionally to attract a new patient clientele or to retain an existing clientele.

Target costing is the process of reducing costs to the point where a profit is earned on the market determined price.It is a management strategy that helps providers deal with situations in which they are price takers. Target costing is an approach to determine a product's life-cycle cost which should be sufficient to develop specified functionality and quality, while ensuring its desired profit. It involves setting a target cost by subtracting a desired profit margin from a competitive market price.

Advantages of Target Costing

Cost Optimization

The main advantage is that target costing helps the business to research and analyses the best possible way to make or acquire products at low cost.

Systematic

Target Costing is systematic and formal in approach. Target costing involves consideration of all equipment, processes, labor and materials needed to make goods, or the costs to acquire goods and get them ready to sell to your customers.

Reduction in Costs

Target Costing helps in reducing costs by minimizing product cycle time. This helps in optimization of resources by reducing or eliminating the wasteful steps which add no value to the end solution to the customers.

Profitability

It is very effective. It provides the business with desired profitability. It considers both cost and price to reach at the desired profits. It exhibits optimal price to cost relationship for the products.