Variable Cost-Plus Pricing


DEFINITION of 'Variable Cost-Plus Pricing'

A pricing method in which the selling price is established by adding a markup to total variable costs. The expectation is that the markup will contribute to meeting all or a part of fixed costs, and generate some level of profit. Variable cost-plus pricing is especially useful in competitive scenarios such as contract bidding, but is not suitable in situations where fixed costs are a major component of total costs.

BREAKING DOWN 'Variable Cost-Plus Pricing'

For example, assume total variable costs for manufacturing one unit of a product are $10 and a markup of 50% is added. The selling price as determined by this variable cost-plus pricing method would be $15. If contribution to fixed costs per unit is estimated at $4, then profit per unit would be $1.

  1. Cost-Plus Contract

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  2. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
  3. Variable Cost

    A corporate expense that varies with production output. Variable ...
  4. Contribution Margin

    A cost accounting concept that allows a company to determine ...
  5. Semi-Variable Cost

    A cost composed of a mixture of fixed and variable components. ...
  6. Unit Cost

    The cost incurred by a company to produce, store and sell one ...
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