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Cost-plus pricing is a pricing strategy by which the selling price of a product is determined by adding a specific fixed percentage (a "markup") to the product's unit cost. Essentially, the markup percentage is a method of generating a particular desired rate of return. [1][2] An alternative pricing method is value-based pricing.
Markup (or price spread) is the difference between the selling price of a good or service and its cost. It is often expressed as a percentage over the cost. A markup is added into the total cost incurred by the producer of a good or service in order to cover the costs of doing business and create a profit.
If margin is 30%, then 30% of the total of sales is the profit. If markup is 30%, the percentage of daily sales that are profit will not be the same percentage. Some retailers use markups because it is easier to calculate a sales price from a cost. If markup is 40%, then sales price will be 40% more than the cost of the item.
Profit margin is calculated with selling price (or revenue) taken as base times 100. It is the percentage of selling price that is turned into profit, whereas "profit percentage" or "markup" is the percentage of cost price that one gets as profit on top of cost price.
Derivation of the markup rule. Mathematically, the markup rule can be derived for a firm with price-setting power by maximizing the following expression for profit: where. Q = quantity sold, P (Q) = inverse demand function, and thereby the price at which Q can be sold given the existing demand. C (Q) = total cost of producing Q.
In other words, the rule is that the size of the markup of price over the marginal cost is inversely related to the absolute value of the price elasticity of demand for the good. [10] The optimal markup rule also implies that a non-competitive firm will produce on the elastic region of its market demand curve. Marginal cost is positive.
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