Rate Of Return Or Rate Of Investment Pricing Methodology(Part4)
In earlier Part 2& Part 3 we have covered cost plus pricing & Variable/Marginal Cost Plus Pricing respectively, in this article we look at the Rate Of Return Pricing Metholodgy:
Rate Of Return Pricing:
- For this type of pricing, the company needs to specify the rate of return on its capital invested;
- Similar to Cost plus pricing,the difference is that the marked up will be based on the target rate of return;
- The target rate of return varies with market norm or what management considers a fair return.
Useful method to use:
- When a business has invested too much on the project or products
[Note: However, this method is difficult to use where a company has too many product lines or competes in many markets]
Simple Illustration:
Capital invested / employed $2,000,000
Target return 10%
Estimated costs $500,000
Mark up
= 10% x $2,000,000
$500,000
=40%
- Full Cost Plus Pricing Methodology(Part2)
- Investment Appraisal Methods: Pros And Cons of Internal Rate of Return.
- Investment Appraisal Methods: Internal Rate of Return (IRR)
- Investment Appraisal Methods or Techniques: Accounting Rate of Return
- Break-Even Pricing And Minimum Pricing Methodologies(Part5)
- Variable/Marginal Cost Plus Pricing(Part3)
- Factors Affecting Pricing(Part 1)
December 11, 2007
Posted in: Pricing Decision
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