Chapter 11 - Establishing the Product Selling Price

Abstract

This chapter summarizes methods and requirements for product cost estimation and pricing. Cost estimation is necessary for determining the economic advantage of the business, which determines the ability of a company to be competitive. It is an established fact and a routine activity critical to be determined for profitability. The second step is the establishment of product selling price which is gained by the addition of profitability factor to the cost. In addition to recovering the cost of business activities, profits must be sufficient to pay taxes (local, state, and national), dividends to stockholders, interest on borrowed capital, research and development funding, reinvestment in upkeep and modernization, and investment in exploring other options. The ramifications of poor or inaccurate selling price after cost estimation can be very serious, ranging from product withdrawal to business bankruptcy. Cost estimation requires a diverse background on the part of the cost estimator; at the very least, the person should have a background in business, economics, finance, and engineering. It is very unlikely that one person would have all the necessary tools for this purpose, and as a result, estimating cost is often done by a team. The techniques used in cost estimation come from different engineering disciplines as well. For instance, time study is the purview of industrial engineers, while estimating machining times from theoretical models may require expertise in manufacturing engineering. Estimating costs from theoretical models or design/cost optimization may fall in the realm of mechanical engineers and operations researchers.