|The pricing policy and pricing method depends on the objective of a firm sets for it. Cost-Plus Pricing is also known as Mark-up or Average Cost or Full Cost Pricing. The Cost-Plus Pricing is the most common method of pricing of a product by the manufacturing firms. The general practice under this method into adds a ‘fair’ percentage of profit marginal to the average variable cost (AVC).|
- The first step in pricing fixation is to estimate the AVC. For this, the firm has to ascertain the volume of its output for a given period of time, generally a fiscal year. To ascertain the output, the firm uses figures of its ‘planned’ or ‘budgeted’ output or takes into account its normal level of production. If the firm is in a position to compute its optimum level of output or the capacity output, the same is used as standard output in computing the AC.
- The another step is to compute the total variable cost (TVC) of the ‘standard output’. The TVC includes direct costs, i.e., cost of labour and raw materials and other variable costs. These costs added together give the total variable cost. The AVC is then obtained by dividing the TVC by the standard output (Qs).