The basic idea underlying this approach is that the selling price of a product must cover its full cost and yield a reasonable margin of profit. The margin may be a fixed amount per unit or a percentage of cost. The margin is known as ‘Mark-up’ and therefore, cost plus pricing is also known as ‘mark up pricing’. The following formula is generally used to fix prices under this approach:
Selling Price = Total cost per unit + Desired profit per unit
Advantages:
1. Cost plus pricing ensures full coverage of costs and helps in achieving a resonable return or capital employed.
2. The method is logical and can be defended on moral grounds. It discourages cut-throat competition in the market.
Disadvantages:
1. If is very often difficult to determine accurately the cost per unit due to common overheads and joint products. The method involves arbitrary allocation of costs in such areas.
2. The mark-up on the cost of the product is not fixed but may change with changes in demand. In practice, the rule of thumb methods are used to determine the mark-up.
