January 31, 2012
MMBA 6550 – Week 5, Discussion 1
Discussion Topic: Cost-Plus Pricing
Cost plus pricing is the accounting strategy used to price goods and services. The ultimate goal of this pricing strategy is to ensure companies set the prices of its goods and services to ensure all cost are covered. In order for cost-plus pricing to be truly effective, “the full cost must be calculated, to which the desired profit margin is added, for every good and service.” (Collier, 2009) Collier (2009) defines profit margin as the percentage of the selling price that is represented by profit. (p. 173) I work in the department of Facilities where we do a lot of service request for maintenance and repairs; therefore, we must contract or outsource for services. Consequently, we incur labor charges on every bill, which is added in to the total cost of the service.
This is companies incorporate cost-plus pricing strategy into their businesses, by identifying how much the total cost of production and distribution of the product or service. This is considered full cost, identify and integrating all cost, which can include, production, delivery, marketing, selling, finance and administrative cost.
To determine the selling price of the product the company must determine the percentage or mark up price on the product or service. For example, if a business determines that a product is worth $45, and they determine that a 15% mark-up will incorporate the full cost of the product, then the selling price will be its full cost needs to be $51.75.
Magloff (2011) identifies a…