Variable Cost-Plus Pricing Definition & Examples

Published Oct 26, 2023

Definition of Variable Cost-Plus Pricing

Variable cost-plus pricing is a pricing strategy where the selling price of a product or service is determined by adding a markup percentage to the variable costs associated with producing or delivering that product or service. Variable costs are costs that change in proportion to the level of production or sales, such as raw materials, direct labor, and variable overhead.

Example

Let’s say Company A produces a consumer product. The variable costs associated with manufacturing and selling this product include the cost of raw materials, direct labor, and variable overhead expenses, such as utilities or packaging materials. The total variable cost per unit is calculated by summing up all these costs.

To determine the selling price, Company A applies a markup percentage to the total variable cost per unit. This markup percentage includes the desired profit margin and other factors such as market competition or customer demand. For example, if the total variable cost per unit is $10 and Company A applies a markup percentage of 30%, the selling price per unit would be $10 x (1 + 0.30) = $13.

Using variable cost-plus pricing allows Company A to ensure that the selling price covers the variable costs incurred to produce and sell the product and also includes a desired profit margin. It provides flexibility to adjust pricing based on changes in variable costs or market conditions.

Why Variable Cost-Plus Pricing Matters

Variable cost-plus pricing is a commonly used pricing strategy across industries. It helps businesses determine a selling price that covers their variable costs and provides an opportunity to earn a profit. By incorporating variable costs into the pricing decision, companies can make informed pricing choices that align with their cost structure and business objectives. Additionally, variable cost-plus pricing can provide transparency to customers, as the selling price is directly linked to the costs associated with producing or delivering the product or service.