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NPV versus IRR: Cost-plus pricing vs. target costing

Explain cost-plus pricing and give an example that shows how prices would be determined using this method. How does it differ from target costing

Suppose a company has 5 different capital budgeting projects from which to choose, but has constrained funds and cannot implement all of the projects. Explain why comparing the projects' NPVs is better than comparing their IRRs.

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Explain cost-plus pricing and give an example that shows how prices would be determined using this method. How does it differ from target costing?

Cost plus pricing means the pricing of the product by adding fixed percentage of profit to the total cost of the product. Here, all costs of products are added and the profit margin is added to find the selling price. There are two types of cost plus pricing.

1. Total cost pricing. In this method all costs both fixed and variable are added and the profit margin is added to the total costs.

2. Direct cost pricing: In this ...

Solution Summary

This solution answers a question regarding NPV and IRR. It discusses cost-plus pricing and target costing.

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