In this post we build upon the price calculation information provided in our article on Cost-Plus Pricing Formula with Examples. It is recommended if you’re unfamiliar with how to undertake cost-plus pricing that you review the above article and information first.
The purpose of this post is to provide further examples of cost-plus pricing. And please note there is a free cost-plus pricing Excel template available for download at the end of this post.
Contents
Cost-plus Pricing Formula and Examples
As you may know, there are two approaches to calculating a retail price using the cost plus pricing method. The first approach only considers the variable cost of the product, whereas the second and more detailed approach considers both variable and fixed costs.
The two cost-plus pricing formulas can be summarized as:
- Retail price = unit product cost X percentage markup
- Retail price = (share of fixed costs/unit sales + related variable costs + unit product cost) X % percentage markup
As you can see, the first approach is very simple, where the company simply multiplies the unit cost (what they pay for the product from the supplier) and adds a percentage markup as their profit margin.
And in the second approach, and allocation of fixed costs, and potentially other variable costs, are added to the unit cost – and this new combined unit cost is then marked up by a suitable profit margin percentage.
Please note that a detailed example has been provided in the article on Cost-Plus Pricing Formula with Examples. This example includes some rationale for the calculation, and which is the more appropriate cost-plus formula to use. Below you will find further examples to help guide your understanding of this pricing calculation method.
Cost-plus formula example 1
Base assumptions
For this example, let’s assume the following information:
- this firm sells one product only
- they sell 100,000 units of this product per year
- the base unit cost of the product is $25
- they undertake some modification of the product prior to reselling it, which works out at $5 per unit
- they have decided that a 20% markup of the combined unit cost is appropriate for their business
- they have annual total fixed costs of $120,000 to cover as well
- therefore, we need to calculate what retail price to charge and what profit the firm would make, given the above assumptions
NOTE: try and complete the calculation yourself, before you review the answer below…
Cost-plus pricing formula calculation
- basic unit cost = $25
- additional variable costs = $5
- combined variable cost = $30 ($25 +$5)
- total fixed costs to cover = $120,000
- fixed cost per unit sold = $1.20 ($120,000 divided by 100,000 units)
- total unit cost = $31.20 ($30 + $1.20)
- markup percentage = 20%
- markup margin = $6.24 (20% X $31.20)
- retail price = $37.44 ($31.20 + $6.24)
- expected total profit contribution = $624,000 ($6.24 margin X 100,000 units)
Cost-plus formula example 2
Base assumptions
For this example, we are going to assume exactly the same above information as for example 1, except for the following changes:
- the sales have dropped to only 50,000 units per year
- and they now have have annual total fixed costs of $150,000 to cover
- as a result, they have decided that a 30% markup of the combined unit cost is
now required to cover the additional fixed costs and the reduction in sales volume
NOTE: try and complete the calculation yourself, before you review the answer below…
Cost-plus pricing formula calculation
Note: variations to the above calculation as shown in bold
- basic unit cost = $25
- additional variable costs = $5
- combined variable cost = $30 ($25 +$5)
- total fixed costs to cover = $150,000
- fixed cost per unit sold = $3.00 ($150,000 divided by 50,000 units)
- total unit cost = $33 ($30 + $3.00)
- markup percentage = 30%
- markup margin = $9.90 (30% X $33)
- retail price = $42.90 ($33 + $9.90)
- expected total profit contribution = $495,000 ($9.90 margin X 50,000 units)
As can be seen, their total profit contribution has reduced from $624,000 to $495,000. While this is a substantial decrease, they have done well to hold their profits, given that fixed costs have increased by $30,000 and their sales have halved.
Cost-plus formula example 3
Base assumptions
Let’s now consider one more, but more detailed, cost-plus pricing example.
For this example, we are going to still going to consider the same firm as above, but let’s assume that they have expanded into a second product line offering – which will change their information as follows:
- the firm now sells two product lines
- with product line 1, they sell 50,000 units
- and for product line 2, they sell 20,000 units
- the base unit cost of product 1 is $25
- the base unit cost of product 2 is $45
- they undertake some modification of product 1 prior to reselling it, which works out at $5 per unit – they do not incur any costs modifying product 2
- they have decided that a 20% markup of the combined unit cost is appropriate for product 1
- but they are seeking a 40% markup of the unit cost for product 2
- they now have annual total fixed costs of $200,000 to cover
- for the purpose of this cost-plus pricing exercise, they are allocating 60% of their fixed costs to product 1, and the remaining 40% to product 2
- therefore, we now need to calculate what retail price to charge for each product line and what profit the firm would make, given the above assumptions and revised situation
NOTE: try and complete the calculation yourself, before you review the answer below…
Cost-plus pricing formula calculation
Because there are now two product lines with different costs and mark-ups, we will need to undertake some of the calculations independently, as follows:
Product 1 calculation
- basic unit cost = $25
- additional variable costs = $5
- combined variable cost = $30 ($25 +$5)
- total fixed costs to cover = $120,000 (60% of $200,000)
- fixed cost per unit sold = $2.40 ($120,000 divided by 50,000 units)
- total unit cost = $32.40 ($30 + $2.40)
- markup percentage = 20%
- markup margin = $6.48 (20% X $32.40)
- retail price = $38.88 ($32.40 + $6.48)
- expected total profit contribution = $324,000 ($6.48 margin X 50,000 units)
Product 2 calculation
- basic unit cost = $45
- additional variable costs = Nil
- combined variable cost = $45
- total fixed costs to cover = $80,000 (40% of $200,000)
- fixed cost per unit sold = $4.00 ($80,000 divided by 20,000 units)
- total unit cost = $49 ($45 + $4.00)
- markup percentage = 40%
- markup margin = $19.60 (40% X $49)
- retail price = $68.60 ($49+ $19.60)
- expected total profit contribution = $392,000 ($19.60 margin X 20,000 units)
Combined Profit Calculation
- Product 1 total profit contribution = $324,000
- Product 2 total profit contribution = $392,000
- TOTAL total profit contribution = $716,000
Download the Free Cost-plus Pricing Formula Excel Template
You can either follow the steps above, or you can download the free Excel template for easily calculating retail prices using the cost-plus pricing formula. A great and easy to use tool for scenario testing of different price points and markups.
You can download your free template here, no sign-up is required,… cost-plus-pricing-formula-excel-template
Here is an example screenshot of the cost-plus pricing formula Excel free template, so you can see what it looks like before you download it. Please note that it starts with some examples, but you can just type over the existing information to construct your own retail price points.
Please note that if you do not wish to include fixed/other costs in your calculation, then simply set that entry to zero – and the template will calculate cost-plus pricing using the simple formula.
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