Why Do Some Firms Use Cost-Plus Pricing?
Many firms use cost-plus pricing, which involves adding a percentage markup to average cost. With this pricing strategy, the firm first calculates average cost at a particular level of production, usually equal to the firm’s expected sales. The firm then applies a percentage markup, say 30 percent, to the estimated average cost to arrive at the price. For example, if average cost is $100 and the percentage markup is 30 percent, the price will be $130. For a firm selling multiple products, the markup is intended to cover all costs, including those that the firm cannot assign to any particular product. Most firms have costs that are difficult to assign to one particular product. For example, the work performed by the employees in the accounting and finance departments at McDonald’s applies to all of McDonald’s products and can’t be assigned directly to Big Macs or Happy Meals.