Full cost pricing method in export
In a full cost pricing method, the export price should be able to recover all costs, both fixed and variable costs. In addition to these, the export pricing takes into account the factor of desirable profit. Thus in this approach, export price is composed of Average Fixed Cost, plus Average Variable Cost, plus Desirable profit.
This approach is also known as cost plus approach or absorption approach.
Objectives of Full-Cost Pricing Method
The objective of full-cost pricing method is to cover costs and to derive a pre-determined percentage of profit. The percentages added to the cost are called margins or mark-ups. The percentages added differ widely from firm to firm, industry to industry and even from product to product in the same industry. Pricing of this type is based on full absorption of costs plus a mark-up for profit.
What determines the mark-up for profit?
This is determined by a variety of considerations, It may be based on common tradition laid down in a particular business or it may be determined by trade associations or guide-lines, if any, provided by the Government.
Advantages of full cost pricing
The following are some of the advantages of full cost pricing method.
1. Full cost pricing method is very simple in the calculation of price of export.
2. Assurance of reasonable return to the exporter.
3. Price competition can be avoided in full cost pricing as all exporters, more or less, use the same pattern of pricing.
4. No possibility of loss from export because all costs are recovered.
5. Cost data collection can be avoided in full cost pricing, because all cost data required for the purpose is available with the exporting fir.
5. It helps in setting fair and plausible prices.
6. It is easy for application by all types of firms whether single-product or multi-product firms.
7. This method safeguards the interest of the firm against risks when the demand is uncertain.
8. It is economical for decision-making.
9. Full-cost pricing, if adopted by all businessmen within the industry may help protect the firms against price-wars or self-damaging price-competitions and at the same time provide some flexibility in adjusting prices to cost changes.
10. Full cost pricing method is the best while dealing with uncertainty and ignorance.
Disadvantages of full cost pricing
The following are some of the disadvantages of full cost pricing method.
1. The so called advantages are only deceptive. Full cost pricing completely ignores all aspects of competition and strategy adopted by competitors.
2. It neglects the demand factor.
3. Calculation of average fixed cost is difficult, particularly in the multi-product firm.
4. Full cost pricing considers only historical costs data and not the future cost data for allocation of costs to products.
5. This method is based on circular reasoning: i.e., price determines the quantity demanded; price charged is dependent upon cost per unit and the cost, in turn depends upon the quantity demanded.
6. It ignores marginal or incremental cost and uses average costs instead.
7. This method totally ignores the influence of demand.
8. Full cost pricing method fails to reflect the forces of competition adequately.
9. Cost is regarded the main factor influencing the price.
10. Undue importance is given for the precision of allocating of costs.
11. The method is based on circular reasoning, i.e., price determines quantity demanded; price charged is dependent upon cost per unit and the cost, in turn, depends upon the quantity demanded.
12. It ignores marginal or incremental cost and uses average cost instead.
In spite of its drawbacks, full-cost pricing is useful, particularly in product tailoring, products designed according to buyer’s specifications, monopoly buying and public utility pricing.