Marginal Cost Pricing

Description of Marginal Cost Pricing. Explanation.

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Definition Marginal Cost Pricing. Description.

Marginal Cost Pricing is an accountants approach to pricing wherein the selling price of additional units equals the additional cost that arises from the expansion of production by one additional unit. This type of pricing can be frequently found in utilities and public services.

After a company's total fixed and variable costs have been recovered by the existing volume of production, the cost of producing extra units will only be the total variable costs of manufacturing it and selling it. So the selling price can be reduced to that level, without making a loss.

A benefit of this approach is its simplicity. Also it is fact-based. A disadvantage is the risk of underestimating customer demand and the value as perceived by the customer as important mechanisms. It could be used by a company during a period of poor sales where the additional sales generated allow it to remain operational without having to reduce its labor force. Of course businesses must normally recover their total costs.

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End of description Marginal Cost Pricing. An explanation.