Page 75 - MAC4861_2 Costing class slides part 2

DECISION MAKING

Approaches to Pricing

Cost-plus pricing:

• Full/long-run cost-plus pricing:

Calculate the full cost of the product and add a % mark up for profit.

• Marginal cost-plus pricing:

Calculate the variable/marginal cost of the product and add a % mark up for profit (mark

up must be larger to cover fixed costs).

Minimum pricing:

• Only the incremental costs of producing the item and any opportunity costs are covered.
Indicates the minimum price that the company should sell the product for so that no loss
is made (anything above this price is profit).

Target costing:

• The target costing approach is to determine the market selling price and desired profit
margin, with a resulting cost which must be achieved.

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