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The three stages of computing the selling price are computing the total cost, computing the unit cost, and then adding a markup to generate a selling price (refer to Fig 1). Fig 1: Cost-plus pricing steps. Step 1: Calculating total cost. Total cost = fixed costs + variable costs
Benefit/Cost Sharing Ratio for cost overruns = 80% Client / 20% Contractor; Benefit/Cost Sharing Ratio for cost underruns = 60% Client / 40% Contractor; If the Actual Cost is higher than the Target Cost, say 1,100, the client will pay: 1,100 + 100 + (1,000 - 1,100) * 0.2 = 1,180 (contractor earns 80).
A cost-plus contract, also termed a cost plus contract, is a contract such that a contractor is paid for all of its allowed expenses, plus additional payment to allow for a profit. Cost-reimbursement contracts contrast with fixed-price contract, in which the contractor is paid a negotiated amount regardless of incurred expenses.
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The PTA is the difference between the ceiling and target prices, divided by the buyer's portion of the share ratio for that price range, plus the target cost. PTA = ( (Ceiling Price - Target Price)/buyer's Share Ratio) + Target Cost. For example, assume: PTA = ( (2,450,000 - 2,200,000)/ 0.80) + 2,000,000 = 2,312,500.
Average Variable Cost (AVC) = Total Variable Cost / Quantity of goods (This formula is cyclic with the TVC one) Average Fixed Cost (AFC) = ATC – AVC; Total Cost = (AVC + AFC) X Quantity of goods; Total Variable Cost = Variable cost per unit X Quantity of goods; Total Fixed Cost = TC – TVC
Contribution margin (CM), or dollar contribution per unit, is the selling price per unit minus the variable cost per unit. "Contribution" represents the portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs.
Assume: Sale price is 2500, Product cost is 1800; Profit = Sale price − Cost 700 = 2500 − 1800 Markup. Below shows markup as a percentage of the cost added to the cost to create a new total (i.e. cost plus). Cost × (1 + Markup) = Sale price; or solved for Markup = (Sale price / Cost) − 1 or solved for Markup = (Sale price − Cost ...
Cost-based pricing is applied through setting the price of a product or good based on its production and delivery cost with a certain target margin. This method shows an emphasis for cost recovery and profit maximisation which tends to result in lower prices in commodities and/or lower quality of goods.
Most systems allow use of transfer pricing multiple methods, where such methods are appropriate and are supported by reliable data, to test related party prices. Among the commonly used methods are comparable uncontrolled prices, cost-plus, resale price or markup, and profitability based methods.