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What is Cost plus pricing?

 In many business the common method of price determining is to estimate the cost of product & fix a margin of profit.. The term ‘cost’ here means full cost at current output and wage levels since these are regarded as most relevant in price determination .In arriving at cost of production, it is necessary to determine the size of the unit whose products are to be costed and priced.

An individual manufacturer may take his cost of production into account and arrive at a price at which the products are to be sold in the concerned region. A manufacturer having several factories all over the country may determine the weighted average cost of each of the factories and include the same in his computations so as to arrive at a uniform price for the country as a whole, e.g., if prices are to be fixed by a statutory authority, like the Tariff Commissions; weighted average price is also taken into account if large number of factories are owned by one manufacturer.

The price may also be fixed after taking into account the cost of a representative unit which may fall within the range of lowest cost unit and the highest cost unit. Alternatively, the factories may be classified into (i) small size factories, (ii) medium size factories, and (iii) large size factories. The cost of medium size factories can be taken into account if this group forms the greater part of the industry. 

Where however, the units in an industry are very large as in the case of textile industry for example, some representative sample has to be taken. The sample should be of economic size and also be of representative of the conditions of the different regions.. The demand of the product and the cost of the marginal unit may have to be taken into account in fixing the price so that the marginal units are not driven out of the market.
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