CIMA BA2 Syllabus B. COSTING - Pricing - Notes ^{9 / 9}

How do we calculate a price for a product?

1. Full cost pricing

   This adds up all our costs (including the fixed overhead) + profit = Selling price

   This is used for absorption costing as this includes the fixed overhead costs. 

   When using this type of pricing, we should include administration and selling costs also to ensure that these are also covered before a profit is added a selling price is created.

   However, the price must be competitive for the products to be sold in the market.

2. Marginal cost pricing

   This adds up all the variable costs + profit = Selling price

   The downside of this is that all the fixed costs may not be covered.

   However, this is good for making decisions as fixed costs are fixed.

How do we calculate profits?

• Mark up

  This is a % on the cost price.

  Therefore, here cost is 100%

  So, if we wanted a mark up of 20%

  Sales 120%
  Profit 20%
  Cost 100%

• Margin 

  This is a % on the sales price.

  Therefore, here sales price is 100%

  So, if we wanted a margin of 20%

  Sales 100%
  Profit 20%
  Cost 80%

Illustration - Margin

Full cost is $100, and the margin should be 20%.

What will the selling price be?

Sales 100%
Profit 20%
Cost 80% = $100

So selling price is 100/80 x 100 = $125

Illustration - mark up

Full cost is $100, and the mark up should be 20%.

What will the selling price be?

Sales 120%
Profit 20%
Cost 100% = $100

So selling price is 100/100 x 120 = $120