Page 98 - BA2 Integrated Workbook STUDENT 2018
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Chapter 5
Pricing decisions
We have now looked at marginal and absorption costing and how they are
calculated. Both can be used when determining the selling price of a product. The
way overheads are treated will have a big impact on the selling price calculated.
5.1 Profit mark-up on costs
Profit mark-up is calculated as a percentage of costs. This can be applied to either
marginal cost or total cost. This is also referred to as cost plus.
With marginal costing, we look at the cost of making and selling one additional unit.
This can be very useful when deciding the selling price for a special order, but may
not be so useful in routine product pricing decisions where it is important to cover all
costs and earn a profit.
Consider the following production costs for a product:
Variable costs $25
Fixed costs $15
If the company uses 60% mark-up on variable costs, the selling price will be $40.
If the company uses 10% mark-up on total costs, the selling price will be $44.
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