Three steps to cost-plus pricing
Compared to other pricing strategies, cost-plus pricing is one of the easiest to calculate. It doesn’t require any competitive analysis or research. Most of the information is likely already tracked by the company.
The cost-plus pricing formula is:
([Direct material costs + Direct labor costs + Overhead] / Number of Units) * (1 + Markup percentage) = Cost-plus price
Note:Direct material and direct labor costs are also referred to as variable costs, while overhead is typically a company’s fixed costs.
To calculate for cost-plus pricing, follow the three steps below:
1. Add the total cost
The first step is to determine how much it costs to produce a certain quantity of products.
To get your total cost, add together:
- Direct material cost
- Direct labor cost
- Overhead costs (operational costs that aren’t directly tied to the final product)
2. Divide the total cost by the number of units
Take the total production cost, and divide it by the number of units in the given production batch. This results in the cost per unit.
3. Multiply the unit cost by the markup percentage
This last step requires some consideration. While there are suggested industry markups, the exact markup percentage is up to the individual company.
A markup is the difference between the cost of your product and its selling price. In other words, it’s your profit.
Markups are typically expressed as a percentage. The higher the markup percentage, the greater your profit for every product sold.
Multiply the cost per product (calculated in the previous step) by the selected markup percentage. The result is the product’s cost-plus price.
Note: A company can have different markup percentages for different products.