Cost-plus pricing The following outline helps students seethe big picture 1 Market-based pricing a Customer-driven external focus b Used by companies facing stiff competition c Target pricing, for example. 2 Cost-based pricing a Internal focus b Used by companies facing less competition or those whose products have no observable market value c Cost-plus pricing, for example. Market-based pricing is becoming more popular, as more companies adopt a customer-driven focus. Target pricing starts with a desired selling price and subtracts target profit to yield allowable target cost that is usually less than currently achievable cost. Cost-plus pricing usually starts with achievable cost and adds desired profit to yield a higher selling price. When achievable cost exceeds allowable cost, cost-based pricing will yield a higher selling price than the target price. Of course, each pricing approach is just a starting point. Before setting a final selling price, managers reevaluate both the effect of proposed prices on demand and their ability to cut costs. Many students want to know whether it is appropriate to set prices based on VC as opposed to full costs. There is no easy answer to this question. In the SR, fora single one-time-only (OTO) special order, contribution margin will increase as long as the selling price exceeds incremental costs. However, single OTO special orders have away of recurring and a series of OTO special orders is really an LR decision. If a company continually fills its plant with output that it cannot sell above full cost, the company should consider downsizing (if it cannot cut costs, raise prices or find an alternative more profitable use for its facilities.
