Cost based pricing with an example

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Cost-based pricing is a pricing method that is based on the cost of production, manufacturing, and distribution of a product. Essentially, the price of a product is determined by adding a percentage of the manufacturing costs to the selling price to make a profit. There are two types of cost-based pricing: cost-plus pricing and break-even pricing. Cost-based pricing is one of a handful of pricing strategies, such as value-based, going-rate, or competition-based pricing.

Cost-based pricing is the practice of setting prices based on the cost of the goods or services being sold. A profit percentage or fixed profit figure is added to the cost of an item, which results in the price at which it will be sold. For example, an attorney calculates that the total cost of running his office each year is 400,000 and he expects to achieve 2,000 billable hours in the coming year. This means that his cost per hour is 200. He wants to generate a 100,000 profit for the year, so he adds 50 to each billable hour, resulting in a billing rate of 250 per hour.

The pricing strategy can be expressed in two particular forms, namely full-cost pricing and direct-cost pricing. In such a case, full-cost pricing depends on several variables - fixed costs and percentage markup. In addition, direct-cost pricing contains variable costs and percentage markup. One of the key indications of cost plus pricing’s success is when marginal revenues equal marginal costs. As a pricing strategy, cost based pricing is easier to use than value based pricing. It is considered to be the simplest method of the pricing available.

Most often, cost based pricing is utilized for the sake of profit maximization. It is calculated through an evaluation of the cost of production of a product along with adding a profit percentage to the price to determine the final selling point. Such a pricing strategy ensures that a company receives a profit margin that meets the anticipated rate of return. Cost based pricing is widely used because of its simplicity and the degree of information required to anticipate the profit. At this point, cost plus pricing is better than value based pricing in cases when the data on costs and demand cannot be obtained easily—experts label cost based pricing as one of the ___ ______ ___________ __________ _____ ________ ______ ___________ _____ __ ___________ ___________ ____ ____________ ________.
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Degree : PG DIPLOMA PROGRAMMES
Course Name : Post Graduate Diploma in Hospital and Health Management
Course Code : PGDHHM
Subject Name : Introduction to Management
Subject Code : MHH 101
Year : 2022