Simultaneous Determination of Joint Product Cost Allocations and Cost-Plus Prices
Abstract (Summary)Product pricing decisions are among the most important and difficult decisions made by managers. The common practice is to use cost-plus pricing policies by which the full product cost is used to determine the selling price. In the context of a joint manufacturing process, an interdependency problem between product costs and prices arises if net realizable value (NRV) cost allocations are used for the bases of joint-product cost-plus pricing. The interdependency problem arises because joint cost allocations are based on product selling prices, which in turn are functions of the allocated costs. A study used a nonlinear programming (NLP) approach to simultaneously determine the optimal joint production decision, joint product cost-plus prices, and joint cost allocations using the NRV method. The NLP solution provides not only the optimal joint production and pricing decisions, but also the necessary conditions for such optimal decision.
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