2.Cost-Based Pricing.Setting prices based on the costs of producing, distributing, andselling the product plus a fair rate of return for effort and risk.Types of CostsFixed Costs.Costs that do not vary with production or sales level. Forexample, a company must pay each month’s bills for rent, heat, interest,and executive salaries regardless of the company’s level of output.Variable Costs.Vary directly with the level of production. Each smartphoneor tablet produced by Samsung involves a cost of computer chips, wires,plastic, packaging, and other inputs. Although these costs tend to be thesame for each unit produced, they are called variable costs because thetotal varies with the number of units produced.Total Costs. These are the sum of the fixed and variable costs for any givenlevel of production. Management wants to charge a price that will at leastcover the total production costs at a given level of production.Cost-Plus Pricing (Mark-up Pricing). Adding a standard markup to the cost ofthe product. Construction companies, for example, submit job bids by estimatingthe total project cost and adding a standard markup for profit. Lawyers,accountants, and other professionals typically price by adding a standard markupto their costs.
