Cost plus pricing is the method of setting the prices depending on the cost factors. In this method, you add the direct material cost, direct labor costs and overhead costs of the product and then can be added with the markup percentages for creating the profit margins. This pricing method can be utilized within the contract of the customers where the seller gets reimbursed by paying negotiated profits by adding the costs incurred.
Calculation of Cost Plus Pricing
Let us assume that the XYZ company has manufactured a product with the following costs:
- Direct material costs = $ 10
- Direct labor costs = $ 4.50
- Allocated Overhead = $ 9.25
The company allows a standard 20% markup to all of its products. For deriving at the price of the product, the ABC Company can add the costs for reaching at the total cost of 23.75 and then the amount can be obtained by multiplying with ( 1 + 0.20 )
Finally, the product price can be calculated at $ 28.5