Cost Plus Pricing (Essay Sample)

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Cost-plus pricing strategy is mainly used by businesses that are market leaders. In this strategy, the business determines a desirable margin for its products and adds this to the total cost of production to come up with the price. The cost of a product is called the full cost and is the sum of all expenses involved in production of a good or service. This includes the manufacturing cost, the delivery cost and all other administrative expenses.
The profit mark-up is the percentage added on the cost of a product for it to be profitable. Profit margin is the percentage of price that represents profit. For a market leader, the mark-up will be an arbitrary figure, which the management thinks will result in highest profits. Some companies calculate their profit margins based on ratios such as return on sales.
Firms, which have a contract with the customer where the customer reimburses the firm for all the costs involved in production of a product, may use this pricing strategy. The firm is in business and therefore the returns have to be higher than the cost of production. The firm has to determine an appropriate mark-up figure before charging the client.
This pricing strategy has the advantage of assured profits for ...