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Variable Cost-Plus Pricing

What is 'Variable Cost-Plus Pricing'

Variable cost-plus pricing is a pricing method in which the selling price is established by adding a markup to total variable costs. The expectation is that the markup will contribute to meeting all or a part of fixed costs, and generate some level of profit. Variable cost-plus pricing is especially useful in competitive scenarios such as contract bidding, but is not suitable in situations where fixed costs are a major component of total costs.

Explaining 'Variable Cost-Plus Pricing'

For example, assume total variable costs for manufacturing one unit of a product are $10 and a markup of 50% is added. The selling price as determined by this variable cost-plus pricing method would be $15. If contribution to fixed costs per unit is estimated at $4, then profit per unit would be $1.


Further Reading


An empirical investigation of the importance of cost-plus pricing
www.ingentaconnect.com [PDF]
… The quadratic form of the average variable cost function of the oligopolistic firm is important ingredient of the presented chaotic cost-plus pricing model (14). REFERENCES 1. Benhabib, J., & Day, RH (1981) … Jablanović, V. (2011). The chaotic Monopoly Price Growth Model …

The dynamics of cost‐plus pricingThe dynamics of cost‐plus pricing
onlinelibrary.wiley.com [PDF]
… The quadratic form of the average variable cost function of the oligopolistic firm is important ingredient of the presented chaotic cost-plus pricing model (14). REFERENCES 1. Benhabib, J., & Day, RH (1981) … Jablanović, V. (2011). The chaotic Monopoly Price Growth Model …

Pricing behaviour and the cost-push channel of monetary policyPricing behaviour and the cost-push channel of monetary policy
www.tandfonline.com [PDF]
… The quadratic form of the average variable cost function of the oligopolistic firm is important ingredient of the presented chaotic cost-plus pricing model (14). REFERENCES 1. Benhabib, J., & Day, RH (1981) … Jablanović, V. (2011). The chaotic Monopoly Price Growth Model …

A theory of the determination of the mark-up under oligopolyA theory of the determination of the mark-up under oligopoly
www.jstor.org [PDF]
… The quadratic form of the average variable cost function of the oligopolistic firm is important ingredient of the presented chaotic cost-plus pricing model (14). REFERENCES 1. Benhabib, J., & Day, RH (1981) … Jablanović, V. (2011). The chaotic Monopoly Price Growth Model …

Pricing decisions and the neoclassical theory of the firmPricing decisions and the neoclassical theory of the firm
www.sciencedirect.com [PDF]
… The quadratic form of the average variable cost function of the oligopolistic firm is important ingredient of the presented chaotic cost-plus pricing model (14). REFERENCES 1. Benhabib, J., & Day, RH (1981) … Jablanović, V. (2011). The chaotic Monopoly Price Growth Model …

Cost accounting for war: Contracting procedures and cost-plus pricing in WWI industrial mobilization in ItalyCost accounting for war: Contracting procedures and cost-plus pricing in WWI industrial mobilization in Italy
www.tandfonline.com [PDF]
… The quadratic form of the average variable cost function of the oligopolistic firm is important ingredient of the presented chaotic cost-plus pricing model (14). REFERENCES 1. Benhabib, J., & Day, RH (1981) … Jablanović, V. (2011). The chaotic Monopoly Price Growth Model …



Q&A About Variable Cost-Plus Pricing


What are some examples of when variable cost-plus pricing can be used?

Examples include manufacturing and service industries.

Is there an alternative to cost-plus pricing?

Yes, value based pricing is an alternative method for determining prices.

What is cost-plus pricing?

Cost-plus pricing is a strategy in which the selling price of goods and services is determined by adding a specific fixed percentage to the singular product's unit cost.

How can you derive a markup percentage using a firm's target rate of return?

The markup percentage can be derived by using the firm's target rate of return.

How does variable cost-plus pricing work in competitive scenarios?

Variable cost-plus pricing works well in competitive scenarios such as contract bidding, but it's not suitable for situations where fixed costs are a major component of total costs.

What is variable cost-plus pricing?

Variable cost-plus pricing is a pricing method in which the selling price is established by adding a markup to total variable costs.

Why does cost-plus pricing exist?

Cost-plus pricing exists because it allows companies to generate profit margins that reach their target rate of return and maximize overall profits.

What do you need to estimate before using this method?

You must estimate contribution to fixed costs per unit.

What does "adding" mean in this context?

Adding means to increase the price by a certain percentage or dollar amount.