What is marginal cost-plus pricing and what are the advantages and limitations?
Marginal cost-plus pricing is a method of pricing a unit of a product at its marginal cost plus some profit. Marginal cost is the total cost of producing an extra unit of a product at a certain level of production. In the short term, when the production is covering whole of the expenses (Fixed and variable), then to enhance the profit, some orders may be accepted at below the regular price, which must be more than the marginal cost of producing those extra units. This is the situation where marginal cost-plus pricing helps. For example: When a factory is covering all of its variable and Fixed costs, and a lucrative export opportunity comes, then that extra production can be sold at a price which may be less than regular price but more than the marginal cost of production.
