Wize University Managerial Accounting Textbook > Pricing
Cost-Plus Pricing
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Cost-Plus Pricing
This pricing method involves adding a mark-up to the cost of goods or services to arrive at the selling price.
Mark-up Percentage
The markup is often expressed as a percentage of the cost of the product.
Cost
The cost base of the product. The cost determined the amount of the mark-up and can be estimated differently:
- Full Cost: All costs related to producing and selling the product
- Absorption Cost: All manufacturing costs (DM, DL, MOH)
- Variable Cost: All variable costs related to producing and selling the product.
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Example: Cost-Plus Pricing
ABC Corp. produces running shoes for track and field athletes. It recently launched a $2,000,000 marketing campaign to promote a new model, and expects to earn a 10% return on this investment. A total of 10,000 pairs of running shoes will be produced for this campaign, the costs incurred are as follows:
Variable Costs
Direct Material: $25 per unit
Direct Labour: $10 per unit
Variable MOH: $9 per unit
Variable Selling Expenses: $3 per unit
Fixed Costs
Fixed MOH: $300,000
Fixed Selling Expenses: $250,000
- What selling price should they charge customers for a pair of running shoes?
- What is the mark-up percentage using full cost-plus pricing?
- What is the mark-up percentage using absorption cost-plus pricing?
- What is the mark-up percentage using variable cost-plus pricing?
Practice: Cost-Plus Pricing
A manufacturer of home appliances plans to produce 50,000 toasters. Fixed costs are $300,000 for manufacturing overhead and $100,000 for selling and administrative costs; Variable costs are $10 per unit ($8 of variable manufacturing costs and $2 of variable selling and administrative costs). The manufacturer wishes to earn a 20% return on the total cost.
The company should charge $ per unit.
If the company uses variable cost-plus pricing, the mark-up should be %.