Question

Why is it important that a manager understands how product cost is determined? 200 words

Answer 1

Below are some of the points to understand importance of knowing product cost for a manager:

• It helps manager to price the product competitively in the market. If the manager knows the cost of its product, then only he can price its product so that it brings maximum profitability to the organization.
• It helps evaluate company cost structures with other competitors. This help manager to understand company competitive advantage and other competitor’s strengths.
• It helps managers to evaluate various business decisions like if the company should make or buy from other suppliers in order to make it more cost effective, sell in the current form or add more value to the product and enhancing the value of product. Such decisions are only possible if the manager knows each product cost and then can evaluate various options depending on the profitability and organization capabilities.
• It helps manager to understand breakeven volumes for the organization and how many units need to be sold in order to reach the desired profitability for the organization.
• It helps manager to identify relevant costs into final pricing of the product. For example, company might want to consider future costs related to product while pricing the product.