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 dynamics of cost‐plus pricing – onlinelibrary.wiley.com [PDF]
- Pricing behaviour and the cost-push channel of monetary policy – www.tandfonline.com [PDF]
- A theory of the determination of the mark-up under oligopoly – www.jstor.org [PDF]
- Pricing decisions and the neoclassical theory of the firm – www.sciencedirect.com [PDF]
- Cost accounting for war: Contracting procedures and cost-plus pricing in WWI industrial mobilization in Italy – www.tandfonline.com [PDF]
