Pricing Strategies: Cost-Plus Pricing

Full cost-plus pricing is a method of determining the sales price by calculating the full cost of the product and adding a percentage mark-up for profit. Advantages of full cost-plus pricing It is a quick, simple and cheap method of pricing which can be delegated to junior managers. Since the size of the profit margin can be varied, a decision based on a price in excess of full cost should ensure that a company working at normal capacity will cover all of its fixed costs and make a profit. Disadvantages of full cost-plus pricing It fails to recognize that since demand may be determining price, there will be a profit maximizing combination of price and demand. There may be a need to adjust prices to market and demand conditions. Budgeted output volume needs to be established. Output volume is a key factor in the overhead absorption rate. A suitable basis for overhead absorption must be selected, especially where a business produces more than one product. There is no attempt to establish optimum price. Marginal cost-plus pricing/mark-up pricing Marginal cost-plus pricing/mark-up pricing involves adding a profit margin to the marginal cost of production/sales.