When price is based on average total cost plus a markup, the method is called

When price is based on average total cost plus a markup, the method is called

• A. Cost-plus pricing
• B. Value-based pricing
• C. Penetration pricing
• D. Skimming pricing

Answer: (A)

Cost-plus pricing. You take the average total cost per unit—combining fixed and variable costs allocated to production—and add a markup to secure the desired profit. This makes pricing straightforward and cost-driven, ensuring costs are covered and providing predictability, which is helpful when demand is uncertain or the product is produced in batches. However, it doesn’t rely on what customers are willing to pay or on competitive prices, so it can miss market opportunities or overprice in hot markets. Other strategies focus on value to customers (value-based pricing) or on market share and competition (penetration or skimming pricing), rather than simply covering costs plus a set markup.

Cost-plus pricing. You take the average total cost per unit—combining fixed and variable costs allocated to production—and add a markup to secure the desired profit. This makes pricing straightforward and cost-driven, ensuring costs are covered and providing predictability, which is helpful when demand is uncertain or the product is produced in batches. However, it doesn’t rely on what customers are willing to pay or on competitive prices, so it can miss market opportunities or overprice in hot markets. Other strategies focus on value to customers (value-based pricing) or on market share and competition (penetration or skimming pricing), rather than simply covering costs plus a set markup.