Business – 5.4 Costs – Uses of cost information | e-Consult
5.4 Costs – Uses of cost information (1 questions)
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In cost‑plus pricing the total cost of producing a unit is calculated first, then a markup is added to achieve the desired profit. Fixed costs (e.g., rent, salaries) are spread over the expected output, so the larger the output the lower the fixed‑cost component per unit. Variable costs (e.g., materials, direct labour) change directly with the number of units produced and are added in full to each unit’s cost.
Example:
| Item | Amount (£) |
| Fixed costs (annual) | £50,000 |
| Expected output | 10,000 units |
| Fixed cost per unit | £5.00 |
| Variable cost per unit | £12.00 |
| Total cost per unit | £17.00 |
| Desired markup (20%) | £3.40 |
| Selling price per unit | £20.40 |
The price reflects both the allocated fixed cost and the full variable cost, plus the markup.