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%