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So I was just going through questions of Make or Buy Decisions and Short Term decision making and there was mention of a minimum price and maximum price calculation in the relevant costing questions which I didn’t understand. Could you please explain
In relevant costing, the minimum price and maximum price calculations are used to determine the range within which the selling price of a product or service should fall.
The minimum price is calculated by considering the variable costs associated with producing the product or service. It includes direct materials, direct labor, and variable overhead costs. The minimum price ensures that the product or service covers its variable costs and contributes towards covering fixed costs.
The maximum price, on the other hand, takes into account both variable costs and a contribution towards fixed costs and profit. It is the highest price at which the product or service can be sold while remaining competitive in the market and generating a desired level of profit.
These calculations help businesses make informed decisions about pricing their products or services, considering both cost factors and market conditions. They ensure that the selling price is set within a range that allows the business to cover its costs, remain competitive, and achieve its desired profitability.
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