Final answer:
The cost management technique in question is target costing, where a competitive price and desired profit margin are used to determine production costs. This method ensures that the price is both market-driven and profitable for the company.
Step-by-step explanation:
The cost management technique that determines cost based on a given competitive price and desired profit is known as target costing. In practice, a firm starts with a competitive price, which is the price that customers are willing to pay for a certain type of product. To this price, the firm adds its desired profit margin to arrive at a target cost for the production of the product.
Utilizing this target cost, the company then works to achieve these cost objectives through design changes, efficiency improvements, and possibly supply chain negotiations. This approach ensures that the final price of a product is market-driven and allows for the desired profit margin. It’s important when setting prices to understand the roles of fixed and variable costs, average total cost, average variable cost, and marginal cost. The firm must combine these perspectives with an analysis of sales, revenue, and market structure to make informed decisions about pricing and production quantities.