What does cost-plus pricing involve?

Cost-plus pricing involves adding a specified dollar amount to the seller's costs to determine the final selling price of a product. This approach ensures that all costs associated with producing a product, including fixed and variable expenses, are covered while also allowing for a profit margin.

The method is straightforward: a business calculates the total production cost of the item and then adds a set dollar amount, which serves as the markup to achieve the desired profit. This can be beneficial for companies that have stable costs and consistent demand, as it provides a clear and systematic way to price goods.

This pricing strategy can help businesses maintain profitability and ensures that they do not sell their products at a loss. It is particularly useful in manufacturing and production environments where costs can be accurately tracked, making it easier to implement a cost-plus pricing model effectively.