Explain the Two Types of Pricing Methods, Full Cost Plus Pricing and Marginal Cost Plus Pricing and the Situations When Each Might Be Considered to Be More Appropriate.

'Full cost plus pricing is a method of determining the sales price by calculating the full cost of the product and adding a percentage mark up for profit.'1 'Marginal cost-plus pricing or mark-up pricing involves adding a profit margin to the marginal cost of production/sales.'2

Full cost plus pricing could be considered to be more appropriate because businesses could have an idea of the percentage profit margin it is hoping to earn and thus enabling it to draw up an average profit mark up to use as a guide for pricing decisions. A situation where this would be generally useful would be within a business that carries out a substantial amount of contract work in which numerous individual or contractual prices must be quoted on a regular basis to potential customers. Furthermore enabling the percentage mark up to be more flexible and varied because it does not have to be rigid and fixed, thus, the percentage mark up can be varied suiting demand conditions in the market.

Marginal cost plus pricing could be considered to be more appropriate because it brings to the attention of management the contributions and the effects of higher and lower sales volume on profit.3 Furthermore creating better awareness of such concepts and implications of marginal costing. Therefore, 'if a product costs Rs 10 per unit and a mark -up of 150 % is added to reach a price of Rs.25 per unit, management should be clearly aware that every additional Rs.1 of sales revenue would add 60 pence to contribution and profit.'4 A situation where this would be generally useful would be within retail industries thus marginal cost plus pricing would be used when there is a readily identifiable basic variable cost. Within retail industries it is quite common for the prices of goods in shops to be fixed by adding a mark up of say 20% to the purchase cost.5