Why does the variable pricing method benefit both the OEM Supplier and the Purchaser throughout the life of the contract?
Variable costs vary in direct proportion to the usage level. Variable costs will decrease relative to the price per unit as the production level rises and rise as the production level falls. For example, the price per unit to manufacture twenty component parts may be five$; whereas, the price per unit to manufacture 100 component parts may be only $4. Both the OEM and the organization benefit from utilizing a variable pricing method over a fixed price method because the manufacturing service provider is protected from losses in a higher than expected demand situation and an organization is protected form losses in a lower than expected demand situation.
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