Marginal cost-plus pricing/ mark- up pricing is a method of determining the sales value by adding a profit margin on to either marginal price of production or marginal cost of sales.
Whereas a full cost- plus method to pricing draws attention to net profit and the net profit margin, a variable expense-plus approach to pricing draws attention to gross profit and the gross profit margin, or contribution.
The positive aspects of a marginal expense-plus strategy to pricing are as follows.
It is a basic and straightforward strategy to use.
The mark-up percentage can be varied, and so mark- up pricing can be adjusted to reflect demand circumstances.
It draws management attention to contribution, and the effects of greater or lower sales volumes on profit. In this way, it helps to develop far better awareness of the ideas and implications of marginal costing and price -volume-profit analysis.
For example, if a item costs Rs 10 per unit and a mark -up of 150 % is added to reach a cost of Rs.25 per unit, management must be clearly conscious that every single additional Rs.1 of sales income would add 60 pence to contribution and profit.
In practice, mark-up pricing is utilised in companies exactly where there is a readily identifiable fundamental variable expense. Retail industries are the most apparent example, and it is fairly typical for the costs of goods in shops to be fixed by adding a mark- up (20% or 33.three%,say ) to the acquire expense.
There are, of course, drawbacks to marginal expense- plus pricing ,
Although the size of the mark-up can be varied in accordance with demand circumstances, it does not ensure that sufficient attention is paid to demand conditions, competitors’ prices and profit maximization.
It ignores fixed overheads in the pricing choice, but the sales price need to be sufficiently high to ensure that a profit is made after covering fixed costs.
Approach to pricing may be taken when a organization is operating at full capacity, and is restricted by a shortage of resources from expanding its output further. By deciding what target profit it would like to earn, it could establish a mark-up per unit of limiting element.
