Cost-plus pricing is a common pricing method used by a large number of firms.
A price based on this method starts with the costs of production and then adds a fixed amount (or fixed percentage) mark-up to generate a required level of profit from each unit sold.
The calculation of cost can be based on all the identified costs of production – called ‘full-cost’ pricing, which considers both fixed and variable costs, or just on the ‘direct’ variable costs of production – called ‘contribution’ or ‘direct cost’ pricing.
Below is a hypothetical cost calculation for a firm producing hand-made wooden cabinets and using a full-cost approach .
Although cost-plus pricing has many advantages, it can be criticised in several ways.