Cost-plus pricing is a
pricing method used by companies. It is used primarily because it is easy to calculate and requires little information. There are several varieties, but the common thread in all of them is that one first calculates the cost of the product, then includes an additional amount to represent profit. Cost-plus pricing is often used on government contracts, and has been criticized as promoting wasteful expenditures.
The method determines the price of a product or service that uses direct costs, indirect costs, and fixed costs whether related to the production and sale of the product or service or not. These costs are converted to per unit costs for the product and then a predetermined percentage of these costs is added to provide a profit margin.
There are several ways of determining cost, and the profit can be added as either a percentage markup or an absolute amount. One example is
where
