Cost-plus pricing
Cost-plus pricing is a pricing strategy by which the selling price of a product is determined by adding a specific fixed percentage (a "markup") to the product's unit cost. Essentially, the markup percentage is a method of generating a particular desired rate of return. An alternative pricing method is value-based pricing. Cost-plus pricing has often been used for government contracts (cost-plus contracts), and has been criticized for reducing incentive for suppliers to control direct costs, indirect costs and fixed costs whether related to the production and sale of the product or service or not. Companies using this strategy need to record their costs in detail to ensure they have a comprehensive understanding of their overall costs. This information is necessary to generate accurate cost estimates. Cost-plus pricing is especially common for utilities and single-buyer products that are manufactured to the buyer's specification, such as for military procurement. The three parts of computing the selling price are computing the total cost, computing the unit cost, and then adding a markup to generate a selling price (refer to Fig 1). Step 1: Calculating total cost Total cost = fixed costs + variable costs Fixed costs do not generally depend on the number of units, while variable costs do. Step 2: Calculating unit cost Unit cost = (total cost/number of units) Step 3a: Calculating markup price Markup price = (unit cost * markup percentage) The markup is a percentage that is expected to provide an acceptable rate of return to the manufacturer. Step 3b: Calculating Selling Price (SP) Selling Price = unit cost + markup price A shop selling a vacuum cleaner will be examined since retail stores generally adopt this strategy. Total cost = 450 * 0.12 Markup price = 450 + 504 Ultimately, the $54 markup price is the shop's margin of profit. Buyers may perceive that cost-plus pricing is reasonable.