Marginal cost-plus pricing / pricing is the method of determining the sales price if you add the profit margin to the production cost or the marginal cost of the sales
. pricing draws attention to net profit and net profit margin, the cost-plus approach of pricing changes draws attention to gross profits and gross profit margins or contributions.
The benefits of the marginal cost-plus approach to pricing are the following.
o This is a simple and easy method.
o The surcharge can be changed, so the spread calculation can be modified according to the terms of the demand.
o Management pays attention to the contribution as well as the higher or lower sales volumes on profit. This helps to create the concept and consequences of wider cost accounting and cost-to-profit analysis. For example, if a product adds 10,000 Rs per unit and a 150% mark per unit to reach Rs.25 per unit, the management should be aware that each additional Rs.1 revenue is 60 penny for the contribution and to profito.
o In practice, premium pricing is used in businesses where an easily identifiable basic variable cost is available. Retail industries are the most obvious example and it is fairly common to fix the prices of goods in stores (20% or 33.3%) for the purchase price.
Of course there are disadvantages to marginal cost and pricing,
o Although the amount of the rebate may vary according to the terms of the demand, it does not ensure that you pay due attention to demand conditions, competitors' prices, and maximizing profits.
o The pricing decision does not take into account the general costs, but the selling price must be high enough for profit to be recovered after covering the fixed costs.
Pricing can be made when an enterprise is working with full capacity and the lack of resources limits its release. By deciding what purpose you want to earn, a limiting factor may increase your premium by unit.
Source by sbobet