clear and convenient way to establish a selling price. This method may be used in determining a contract price by a supplier seeking to avoid the uncertainty associated with predicting costs. Cost plus pricing may be found in developmental contracts for new products. Federal agencies deal with cost plus fixed fee contracts. In cost plus pricing, an item is priced at its cost (including direct material, direct labor, and factory overhead) plus some fixed fee or profit markup. For example, if the total cost of a contract is $325,000 and the fixed fee is $100,000, the contract price would be$425,000. If a profit markup is used, it should be based on the nature of the product and corporate considerations (e.g., marketing aspects). For example, if cost is $200,000 and a profit markup on cost of 30% is desired, the ract price is $260,000.
When cost plus pricing is used to determine a transfer price for an internal transfer of a product within the organization, it closely approximates an outside market price. Thus, the resulting synthetic market price is considered a good practical substitute.
