Cost- plus pricing - Wikipedia, the free encyclopedia. Cost- plus pricing is a pricing strategy in which the selling price is determined by adding a specific dollar amount markup to a product's unit cost. Mark ups are when you add a % to the cost to set the price. An alternative pricing method is value- based pricing. This information is necessary to generate accurate cost estimates. Cost- plus pricing is especially common for utilities and single- buyer products that are manufactured to the buyer's specification such as military procurement. Mechanics. The unit cost is the total cost divided by the number of units. The total cost is the sum of fixed and variable costs. Fixed costs do not generally depend on the number of units, while variable costs do. The markup is a percentage that is expected to provide an acceptable rate of return to the manufacturer. Cost Plus Program Definition Computer![]() In some cases, the markup is mutually agreed upon by buyer and seller. In product areas that feature relatively similar production costs, cost- plus pricing can offer competitive stability if all firms adopt cost- plus pricing. ![]() Cost- based pricing is a way to induce a seller to accept a contract whose total costs represent a large fraction of the seller's revenues, or in which costs are uncertain at contract signing. Economic theory. In the long run, marginal and average costs (as in cost- plus) tend to converge, reducing the difference between the two strategies. It works great when a business is in need of short- term finance. One of the most common pricing methods used by firms is cost- plus pricing. Cost-reimbursable (or cost-plus) contracts involve payment to the seller for seller’s actual costs.,' 'PMI-RMP,' 'PMI Scheduling Professional (PMI-SP),' 'PMI-SP,' 'Program Management Professional. A Refresher on Cost Plus. Will your Cost Plus Program be Audited? As long as the Cost Plus plan meets the definition of a Private Health Services Plan. A Cost Plus Incentive Fee Vs. A cost-plus-fixed-fee contract reimburses costs and pays the contractor a fee that is negotiated prior to signing the contract. In spite of its ubiquity, economists rightly point out that it has serious methodological flaws. It takes no account of demand. There is no way of determining if potential customers will purchase the product at the calculated price. To compensate for this, some economists have tried to apply the principles of price elasticity to cost- plus pricing. We know that: MR = P + ((d. P / d. Q) * Q)where: MR = marginal revenue. Definition of cost-plus pricing: One method used by businesses to determine how to price goods and services. This type of pricing includes the variable. Definition of cost plus contract. Contractors generally look for a cost plus contract when signing jobs, because in that case they will be paid for the job and the supplies come at no cost to them either. Cost plus benefit coverage. Group benefit plans provided by Sun Life Assurance Company of Canada include coverage for many medical and. ![]() P = price(d. P / d. Q) = the derivative of price with respect to quantity. Q = quantity. Since we know that a profit maximizer, sets quantity at the point that marginal revenue is equal to marginal cost (MR = MC), the formula can be written as: MC = P + ((d. P / d. Q) * Q)Dividing by P and rearranging yields: MC / P = 1 +((d. P / d. Q) * (Q / P))And since (P / MC) is a form of markup, we can calculate the appropriate markup for any given market elasticity by: (P / MC) = (1 / (1 - (1/E)))where: (P / MC) = markup on marginal costs. E = price elasticity of demand. In the extreme case where elasticity is infinite: (P / MC) = (1 / (1 - (1/9. P / MC) = (1 / 1)Price is equal to marginal cost. At the other extreme, where elasticity is equal to unity: (P /MC) = (1 / (1 - (1/1)))(P / MC) = (1 / 0)The markup is infinite. Most business people do not do marginal cost calculations, but one can arrive at the same conclusion using average variable costs (AVC): (P / AVC) = (1 / (1 - (1/E)))Technically, AVC is a valid substitute for MC only in situations of constant returns to scale (LVC = LAC = LMC). When business people choose the markup that they apply to costs when doing cost- plus pricing, they should be, and often are, considering the price elasticity of demand, whether consciously or not. Cost Plus Contracts (CONCEPT 3. This is our 3. 5th post in our Project Management Professional (PMP). Cost Plus Contracts. Cost- reimbursable (or cost- plus) contracts involve payment to the seller for seller’s actual costs, plus a fee typically representing seller profit. Cost- reimbursable contracts place more risk on the buyer. Three common types: cost plus fixed fee (CPFF), cost plus incentive fee (CPIF), and cost plus award fee (CPAF) Cost Plus Fixed Fee (CPFF)In a CPFF contract the seller is reimbursed for allowable costs for performing the work and also receives a fixed fee payment that is calculated as a percentage of the initial estimated project costs. The fee amount would only change if there was a change to the project scope. Contract value = actual costs + fixed fee Cost Plus Incentive Fee (CPIF)In a CPIF contract the seller is reimbursed for allowable costs and the seller receives an incentive fee based on achieving certain performance objectives. If the final costs are less or greater than the original estimated costs, then both the buyer and seller share costs based upon a pre- negotiated formula (such as 7. Generally the first number in the split refers to the buyer’s portion, the second number to the seller’s portion. Contract value = actual costs . The majority of the fee is only earned based on the satisfaction of identified broad subjective performance criteria. The performance criteria is defined and included in the contract and the fee determination is based solely on the determination of seller performance by the buyer and is usually not subject to appeals. Contract value = actual costs + buyer- defined performance fee Examples CPFF: The contract states that the builder will be reimbursed for the costs associated with the construction of the shed, estimated at $1. In addition, the builder will receive a fixed fee equal to 5. If the final costs are $1. Cost (1. 00% of actual costs)$5,0. Fixed Fee (5. 0% of the $1. Total CPIF: The contract states that the artist will have all costs reimbursed for the new sign, estimated at $5,0. If final costs are higher or lower than $5,0. If the final costs are $6,0. Cost (1. 00% of estimated costs)$5. Cost (5. 0/5. 0 split of the $1. Incentive Fee ($2. Total CPAF: The contract states that the performer will be reimbursed for their costs and in addition will receive an award fee based on the reaction of the audience. If the final costs are $1. See all posts in our PMP Concepts Learning Series.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. Archives
November 2017
Categories |