full-cost pricing

full-cost pricing

see COST-BASED PRICING.

Fig. 77 Full-cost pricing. The price (OP) is made up of three elements: a contribution to cover part of the firm's overhead costs (average FIXED COST) - AB; the actual unit cost (average VARIABLE COST) of producing a planned output of OQ units - BC; a PROFIT MARGIN expressed as a fixed percentage of total unit costs (average variable cost plus average fixed cost) - CD.

full-cost pricing

a pricing method that sets the PRICE of a product by adding a percentage profit mark-up to AVERAGE COST or unit total cost, where unit total cost is composed of average or unit variable cost and average or unit fixed cost. See Fig. 77 . A key element in full-cost pricing is the estimate of sales volume that is necessary to calculate average fixed cost and required unit contribution, although inevitably the price charged will itself affect sales volume. The full-cost pricing method is also called AVERAGE-COST PRICING. Although this pricing method is based upon costs, in practice managers take into account demand and competition by varying the target profit markup over time and between products. Compare MARGINAL-COST PRICING. See COST-PLUS PRICING.