how variable cost plus pricing works
variable costs include direct labor direct materials and other expenses that change in proportion to production output a firm employing the variable cost plus pricing method would first calculate the variable costs per unit then add a mark up to cover fixed costs per unit and generate a targeted profit margin for example assume that total variable costs for manufacturing one unit of a product are 10 the firm estimates that fixed costs per unit are 4 to cover the fixed costs and leave a profit per unit of 1 the firm would price the unit at 15 this type of pricing method is purely inward looking it does not incorporate benchmarking with competitors prices or consider how the market views the price of an item 