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Determination of return on capital employed is one of the most crucial aspect of price fixation process. In this process instead of arbitrarily adding a percentage on cost for profit, the firm determines an average mark up on cost necessary to produce a desired rate of return on its investment.
Under this method three issues arise:
(a) The basis on which the capital employed is computed.
(b) Which items should be covered in the return on capital.
(c) What rate of return can be regarded as fair?
(a) The basis on which the capital employed is computed.
(b) Which items should be covered in the return on capital.
(c) What rate of return can be regarded as fair?
The rate of return to be earned by the firm or industry must depend on the risk involved. The desirability of earning adequate profits for the purpose of ploughing back into business should be kept in mind.
It would be correct to assume that allowing the industry to earn adequate return on the capital employed would attract additional capital and increase the number of factories and production of all commodity which must ultimately lead to competition and reduction in costs and prices.
