The cost plus method is used in pricing whereby an organization comes up with the price of goods and services by simply adding a predetermined mark-up to direct costs that are incurred during production and distribution so as to achieve a certain desired profit margin.
Key Features of Cost Plus Method
- Direct costs such as materials, labor, utilities and overheads are carefully tracked and quantified
- A standard mark-up rate, usually a percentage of direct costs, is then imposed to calculate price
- This pricing model guarantees full recovery of costs simultaneously along with intended profit earnings
- While simple, it may yield prices uncompetitive against adaptive market-based alternates
Example of Cost Plus Method
A manufacturer of industrial tools prices new products via cost plus, analyzing cost components meticulously to apply a 15% surcharge and compete viably against low-cost overseas options.
Key Takeaways
Applicable for unique projects with unpredictable expenses, the cost plus approach supplies confidence in profitability yet risks inflexibility. Blending it periodically with demand-based tactics sustains balance between market realities and margin goals.