{"showCoverPage":true,"bookCover":{"coverDescription":"

When to use this method?  <\/strong><\/h3>\n\n
Click through the pages to find out and review the elements of this topic.<\/p>\n","coverMedium":{"params":{"decorative":true,"contentName":"Image","expandImage":"Expand Image","minimizeImage":"Minimize Image","title":"Photo by Pritesh Sudra on Unsplash","file":{"path":"images\/file-66312941afb0d.jpg","mime":"image\/jpeg","copyright":{"license":"U"},"width":5184,"height":3456}},"library":"H5P.Image 1.1","metadata":{"contentType":"Image","license":"U","title":"Untitled Image"},"subContentId":"3aac7a62-d1d8-4cab-841f-9d0283515a1d"}},"chapters":[{"params":{"content":[{"content":{"params":{"text":"
When to use this method?<\/strong><\/p>\n\n
This method is helpful for a company making short-term decisions by evaluating variable costs (which are costs more likely to fluctuate longer term) from the fixed cost behaviour patterns separately. <\/p>\n\n
When using a variable cost-plus pricing method, all variable costs related to the product are calculated including variable selling and administrative costs into the cost base. As fixed costs are not included in the cost base, the identified markup must cover the fixed costs and the target ROI.  <\/p>\n"},"library":"H5P.AdvancedText 1.1","metadata":{"contentType":"Text","license":"U","title":"Untitled Text"},"subContentId":"2ff8f8f3-30fd-452b-8919-61b2d3dc72e6"},"useSeparator":"auto"},{"content":{"params":{"text":"
\n\t\n\t\t\n\t\t\t
\n\t\t\t
\n\t\t\tStep 1: Calculate the variable cost per unit \n\t\t\t<\/div>\n\n\t\t\t
\n\t\t\tTo apply this, let us return to the case example of our snowboard company\n\t\t\t<\/div>\n\n\t\t\t\n\t\t\t\t\n\t\t\t\t\t\n\t\t\t\t\t\t\n\t\t\t\t\t\t\n\t\t\t\t\t\t\n\t\t\t\t\t\t\n\t\t\t\t\t\t\n\t\t\t\t\t\t\n\t<\/tbody>\n<\/table>\n"},"library":"H5P.Table 1.2","metadata":{"contentType":"Table","license":"U","title":"Step 1: Calculate the variable cost per unit"},"subContentId":"43b60220-ddcd-40c3-9c08-d8cb717c256e"},"useSeparator":"auto"},{"content":{"params":{"text":"
Step 2: Calculate the markup percentage <\/strong><\/p>\n\n
For the snowboard company to determine the markup percentage, they must use the below formula. <\/p>\n\n
Desired ROI +   Fixed Manufacturing Overhead = <\/strong><\/p>\n\n
Markup Percentage x Variable Cost Per Unit + Selling\/Administrative Expenses Per Unit <\/strong><\/p>\n\n
Applying this formula,the corresponding costs are outlined below: <\/p>\n\n
      $250         +      ($375 + 18)    =      MP       X $370 <\/strong><\/p>\n\n
Markup Percentage = (250 + (375 +18)) \/370 = 173% <\/strong><\/p>\n\n
<\/strong><\/p>\n"},"library":"H5P.AdvancedText 1.1","metadata":{"contentType":"Text","license":"U","title":"Untitled Text"},"subContentId":"9e331d92-6f30-41c3-ae7b-bfee6bac4cbb"},"useSeparator":"auto"},{"content":{"params":{"text":"
The third step is to then set the target selling price. Through the above formula, the selling price can be calculated. <\/p>\n\n
Variable Cost per Unit + (Markup Percentage x Variable Cost per Unit) = Target Selling Price <\/strong><\/p>\n\n
370 + (173% x 370)    = $958 <\/strong><\/p>\n\n\n\t\n\t\t\n\t\t\t\n\t\t\t
<\/p>\n\t\t\t\n\t\t\t\n\t\t\t
Per Unit <\/strong><\/p>\n\t\t\t\n\t\t\n\t\t\n\t\t\t\n\t\t\t
Variable Cost <\/p>\n\t\t\t\n\t\t\t\n\t\t\t
370 <\/p>\n\t\t\t\n\t\t\n\t\t\n\t\t\t\n\t\t\t
Fixed Cost <\/p>\n\t\t\t\n\t\t\t\n\t\t\t
375 <\/p>\n\t\t\t\n\t\t\n\t\t\n\t\t\t\n\t\t\t
Total Cost <\/p>\n\t\t\t\n\t\t\t\n\t\t\t
745 <\/p>\n\t\t\t\n\t\t\n\t\t\n\t\t\t\n\t\t\t
Desired ROI <\/p>\n\t\t\t\n\t\t\t\n\t\t\t
250 <\/p>\n\t\t\t\n\t\t\n\t\t\n\t\t\t\n\t\t\t
Selling price per unit <\/p>\n\t\t\t\n\t\t\t\n\t\t\t
$995 <\/p>\n\t\t\t\n\t\t\n\t\n\n"},"library":"H5P.AdvancedText 1.1","metadata":{"contentType":"Text","license":"U","title":"Untitled Text"},"subContentId":"8eb9f53e-a47a-4a22-8ce3-218d1a929518"},"useSeparator":"auto"}]},"library":"H5P.Column 1.18","metadata":{"contentType":"Column","license":"U","title":"Variable Cost-Plus Pricing"},"subContentId":"05c17717-e934-4d05-8f44-d7c9b03eec42"},{"params":{"content":[{"content":{"params":{"text":"
The problem with using the variable-cost pricing model is that managers may set the price low, which would lead them to fail in covering their fixed costs and will lead to a net loss in the long-run. Oftentimes, companies using this model often use a higher markup price to ensure coverage of their costs. <\/p>\n\n
\n
Whether using total cost, absorption cost, and variable cost, an important component that is essential for the company is to reach the budgeted sales quota for that identified period. Without relevant sales, their ROI will not be achieved. None of the approaches guarantee a profit or desired ROI, which is oftentimes outside of the companies control (e.g., market conditions, political shifts, legal concerns with the product, etc.) <\/em><\/p>\n\n
\n
As allocated fixed costs are included in the absorption-cost approach, there is no information on how the company\u2019s costs will change as a result of sales volumes. To reduce the impacts of cost behaviour on operating income, some decision-makers prefer the variable cost approach, as variable-cost pricing: <\/p>\n\n
\n\t
\n\t
Is more consistent with the cost-volume-profit analysis which is used to measure profit impacts to changes of price and volume (as it is based on variable costs) <\/p>\n\t<\/li>\n\t
\n\t
Shows incremental costs of each order, thereby providing managers with the information needed for special pricing; and <\/p>\n\t<\/li>\n\t
\n\t
Avoids arbitrary allocation of common fixed costs to each product line.  <\/p>\n\t<\/li>\n<\/ul>\n"},"library":"H5P.AdvancedText 1.1","metadata":{"contentType":"Text","license":"U","title":"Untitled Text"},"subContentId":"da4ca7aa-825a-4802-9935-9897cb487472"},"useSeparator":"auto"}]},"library":"H5P.Column 1.18","subContentId":"62457142-4424-4bbd-8ce2-ff2fefa7f63b","metadata":{"contentType":"Column","license":"U","title":"Issues with using the variable-cost pricing"}},{"params":{"content":[{"content":{"params":{"media":{"disableImageZooming":false},"text":"Fill in the missing words","overallFeedback":[{"from":0,"to":100}],"showSolutions":"Show solution","tryAgain":"Retry","checkAnswer":"Check","submitAnswer":"Submit","notFilledOut":"Please fill in all blanks to view solution","answerIsCorrect":"':ans' is correct","answerIsWrong":"':ans' is wrong","answeredCorrectly":"Answered correctly","answeredIncorrectly":"Answered incorrectly","solutionLabel":"Correct answer:","inputLabel":"Blank input @num of @total","inputHasTipLabel":"Tip available","tipLabel":"Tip","behaviour":{"enableRetry":true,"enableSolutionsButton":true,"enableCheckButton":true,"autoCheck":false,"caseSensitive":true,"showSolutionsRequiresInput":true,"separateLines":false,"confirmCheckDialog":false,"confirmRetryDialog":false,"acceptSpellingErrors":false},"scoreBarLabel":"You got :num out of :total points","a11yCheck":"Check the answers. The responses will be marked as correct, incorrect, or unanswered.","a11yShowSolution":"Show the solution. The task will be marked with its correct solution.","a11yRetry":"Retry the task. Reset all responses and start the task over again.","a11yCheckingModeHeader":"Checking mode","confirmCheck":{"header":"Finish ?","body":"Are you sure you wish to finish ?","cancelLabel":"Cancel","confirmLabel":"Finish"},"confirmRetry":{"header":"Retry ?","body":"Are you sure you wish to retry ?","cancelLabel":"Cancel","confirmLabel":"Confirm"},"questions":["
Step 1: Calculate the variable cost per unit <\/p>\n\n
Step 2: Calculate the markup percentage <\/p>\n\n
Step 3: Set the target selling price.<\/p>\n\n
Variable Cost per Unit + (Markup Percentage x Variable Cost per Unit) = Target Selling Price <\/p>\n"]},"library":"H5P.Blanks 1.14","metadata":{"contentType":"Fill in the Blanks","license":"U","title":"Fill in the Blanks"},"subContentId":"77be3ecf-1cf6-4a9f-833d-78e9a1731fab"},"useSeparator":"auto"}]},"library":"H5P.Column 1.18","metadata":{"contentType":"Column","license":"U","title":"Check for Understanding"},"subContentId":"cedc777c-13da-4f51-8aaf-fc675d369bd1"}],"behaviour":{"baseColor":"#1768c4","defaultTableOfContents":true,"progressIndicators":true,"progressAuto":true,"displaySummary":true,"enableRetry":true},"read":"Read","displayTOC":"Display 'Table of contents'","hideTOC":"Hide 'Table of contents'","nextPage":"Next page","previousPage":"Previous page","chapterCompleted":"Page completed!","partCompleted":"@pages of @total completed","incompleteChapter":"Incomplete page","navigateToTop":"Navigate to the top","markAsFinished":"I have finished this page","fullscreen":"Fullscreen","exitFullscreen":"Exit fullscreen","bookProgressSubtext":"@count of @total pages","interactionsProgressSubtext":"@count of @total interactions","submitReport":"Submit Report","restartLabel":"Restart","summaryHeader":"Summary","allInteractions":"All interactions","unansweredInteractions":"Unanswered interactions","scoreText":"@score \/ @maxscore","leftOutOfTotalCompleted":"@left of @max interactions completed","noInteractions":"No interactions","score":"Score","summaryAndSubmit":"Summary & submit","noChapterInteractionBoldText":"You have not interacted with any pages.","noChapterInteractionText":"You have to interact with at least one page before you can see the summary.","yourAnswersAreSubmittedForReview":"Your answers are submitted for review!","bookProgress":"Book progress","interactionsProgress":"Interactions progress","totalScoreLabel":"Total score","a11y":{"progress":"Page @page of @total.","menu":"Toggle navigation menu"}}
<\/td>\n\t\t\t\t\t\t Per Unit<\/td>\n\t\t\t\t\t<\/tr>\n\t\t\t\t\t
Direct Materials<\/td>\n\t\t\t\t\t\t 123<\/td>\n\t\t\t\t\t<\/tr>\n\t\t\t\t\t
Direct Labour<\/td>\n\t\t\t\t\t\t 117<\/td>\n\t\t\t\t\t<\/tr>\n\t\t\t\t\t
Variable Manufacturing Overhead<\/td>\n\t\t\t\t\t\t 112<\/td>\n\t\t\t\t\t<\/tr>\n\t\t\t\t\t
Variable Selling and Administrative Expenses<\/td>\n\t\t\t\t\t\t 18<\/td>\n\t\t\t\t\t<\/tr>\n\t\t\t\t\t
Variable Cost Per Unit<\/td>\n\t\t\t\t\t\t 370<\/td>\n\t\t\t\t\t<\/tr>\n\t\t\t\t<\/tbody>\n\t\t\t<\/table>\n\t\t\t<\/th>\n\t\t\t <\/th>\n\t\t<\/tr>\n\t<\/thead>\n\t