Variable Cost-Plus Pricing

What is 'Variable Cost-Plus Pricing'

Variable cost-plus pricing is 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.

RELATED TERMS
  1. Cost-Plus Contract

    An agreement to pay a company for a job based on the amount of ...
  2. Variable Cost Ratio

    Variable costs expressed as a percentage of sales. The variable ...
  3. Variable Cost

    A corporate expense that varies with production output. Variable ...
  4. High-Low Method

    In cost accounting, a way of attempting to separate out fixed ...
  5. Operating Cost

    Expenses associated with the maintenance and administration of ...
  6. Semi-Variable Cost

    A cost composed of a mixture of fixed and variable components. ...
Related Articles
  1. Professionals

    Break-Even Analysis

    This analysis is used to determine the point at which revenue received equals the costs associated with receiving the revenue
  2. Professionals

    Modifying Output

    Modifying Output. Learn the difference between the economic short and long runs.
  3. Investing

    Variable Costs

    Variable costs go up when a company produces more goods or services, and go down when it produces fewer goods or services. This is compared to fixed costs, which do not change in proportion to ...
  4. Professionals

    Variable Contracts

    FINRA Series 6: Section 11 Variable Contracts
  5. Investing

    What's a Sensitivity Analysis?

    Sensitivity analysis is used in financial modeling to determine how one variable (the target variable) may be affected by changes in another variable (the input variable).
  6. Fundamental Analysis

    The Operating Leverage And DOL

    Operating leverage tells investors about the relationship between a company's fixed and variable costs. The higher a company's fixed costs in relation to its variable costs, the greater its operating ...
  7. Economics

    Understanding Regression

    Regression is a statistical analysis that attempts to predict the effect of one or more variables on another variable.
  8. Investing

    What are Fixed Costs?

    Fixed costs are business expenses that do not change as the level of production goes up or down. They are one of two types of business expense, the other being variable costs. Variable costs ...
  9. Financial Advisors

    Variable Annuities: The Pros and Cons

    Variable annuities are one of the most complicated financial instruments. Here is an in depth look at their pros and cons.
  10. Professionals

    Variable Contracts

    FINRA/NASAA Series 26: Section 3 - Variable Contracts
RELATED FAQS
  1. Do production costs include all fixed and variable costs?

    Learn more about fixed and variable costs and how they affect production costs. Understanding how to graph these costs can ... Read Answer >>
  2. Is it better for a company to have fixed or variable costs?

    Understand the difference between a fixed cost and a variable cost, and learn how a company benefits from having more fixed ... Read Answer >>
  3. What is the difference between fixed cost and total fixed cost?

    Learn what a fixed cost is, what a variable cost is, what total fixed costs are, and the difference between a fixed cost ... Read Answer >>
  4. How are fixed costs treated in cost accounting?

    Learn how fixed costs and variable costs are used in cost accounting to help a company's management in budgeting and controlling ... Read Answer >>
  5. What is the difference between direct costs and variable costs?

    Learn about variable costs and direct costs, how direct costs and variable costs are classified and the differences between ... Read Answer >>
  6. What is the difference between variable cost and fixed cost in economics?

    Learn what total costs are comprised of, what variable costs and fixed costs are and what the main difference between fixed ... Read Answer >>
Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center