AQA · GCSE · Business

    Course version: 8132 · Version from Sept 2017

    Price, product, promotion and place (4Ps): cost-plus.

    Full specification wording

    The elements of the marketing mix: price, product, promotion and place (4Ps): cost-plus.

    Cost-plus pricing is a method where a business calculates the total cost of producing or buying one unit of a product, then adds a fixed percentage or cash amount as profit to set the selling price.

    Checked against the AQA 8132 specification (opens in a new tab) on .

    • Point 7 of 80
    • 4 key terms

    Study notes

    From the checked teaching notes for this specification point.

    The idea

    Cost-plus pricing is a method where a business calculates the total cost of producing or buying one unit of a product, then adds a fixed percentage or cash amount as profit to set the selling price. The formula is: selling price = unit cost + (unit cost × mark-up percentage). For example, if a unit costs £8 to make and the business applies a 25% mark-up, the profit added is £8 × 0.25 = £2, so the selling price is £8 + £2 = £10. The unit cost must include both variable costs, such as raw materials and packaging, and an allocation of fixed costs, such as rent and salaries, divided by output. Cost-plus guarantees a margin on every sale provided the cost estimate is accurate, but it ignores competitor prices and what customers are willing to pay, so the final price may be uncompetitive or too low to maximise revenue.

    What earns the marks

    • Defines cost-plus as setting price by calculating unit cost and adding a mark-up for profit.
    • States the formula: selling price = unit cost + (unit cost × mark-up percentage).
    • Explains that unit cost includes variable costs plus a share of fixed costs divided by output.
    • Applies the method to a numerical example, such as unit cost £8 with a 25% mark-up giving a £10 selling price.
    • Evaluates the advantage that a known profit margin is built into every sale.
    • Evaluates the drawback that the price ignores competitors and customer willingness to pay.

    Common mistakes and how to put them right

    • Adding the mark-up only to variable costs and ignoring fixed costs.

      Put it right: Calculate total unit cost including an allocation of fixed costs before applying the mark-up.

    • Applying the mark-up as a fraction of the selling price rather than of the unit cost.

      Put it right: Multiply the unit cost by the mark-up percentage and add that amount to the unit cost.

    • Treating cost-plus as the only pricing method.

      Put it right: Recognise that it is one method among several, such as competitive pricing and price skimming.

    Exam tips

    • Show each step of the calculation clearly so that the unit cost, the mark-up amount and the final price are all visible.
    • When asked to evaluate, give one advantage and one drawback of cost-plus and link each to the specific business context in the case study.
    • Use the correct formula in words or symbols and check that the mark-up percentage has been converted to a decimal before multiplying.

    Try the lesson

    The start of the The elements of the marketing mix: price, product, promotion and place (4Ps): cost-plus. lesson, made from checked teaching notes for this specification point.

    Have a go first

    Which pricing method sets a price by adding a fixed percentage on top of the cost of making a product?

    Listen

    Cost-plus pricing is a method where a business calculates the total cost of producing or buying one unit of a product, then adds a fixed percentage or cash amount as profit to set the selling price. The formula is: selling price = unit cost + (unit cost × mark-up percentage). For example, if a unit costs £8 to make and the business applies a 25% mark-up, the profit added is £8 × 0.25 = £2, so the selling price is £8 + £2 = £10. The unit cost must include both variable costs, such as raw materials and packaging, and an allocation of fixed costs, such as rent and salaries, divided by output. Cost-plus guarantees a margin on every sale provided the cost estimate is accurate, but it ignores competitor prices and what customers are willing to pay, so the final price may be uncompetitive or too low to maximise revenue. A strong answer earns marks for these points. Defines cost-plus as setting price by calculating unit cost and adding a mark-up for profit. States the formula: selling price = unit cost + (unit cost × mark-up percentage). Explains that unit cost includes variable costs plus a share of fixed costs divided by output. Applies the method to a numerical example, such as unit cost £8 with a 25% mark-up giving a £10 selling price. A common slip: Adding the mark-up only to variable costs and ignoring fixed costs. Instead, calculate total unit cost including an allocation of fixed costs before applying the mark-up. Exam tip: Show each step of the calculation clearly so that the unit cost, the mark-up amount and the final price are all visible.

    See it

    A top-down flowchart. It starts with a node labelled Calculate unit cost, which branches into two nodes: Include variable costs and Include share of fixed costs divided by output. Both of these lead into a node labelled Unit cost. From Unit cost, one arrow goes to a node labelled Multiply unit cost by mark-up percentage, which leads to a node labelled Mark-up amount. Another arrow from Unit cost goes to a node labelled Add mark-up amount to unit cost, and the Mark-up amount node also feeds into this same node. This final node leads to a node labelled Selling price.
    Shows how cost-plus pricing builds the selling price from unit cost plus a mark-up.

    Key words

    Say what each word means before you turn the card.

    Cost-plus

    Try answering aloud or in your head before turning the card.

    Unit cost

    Try answering aloud or in your head before turning the card.

    Mark-up

    Try answering aloud or in your head before turning the card.

    Profit margin

    Try answering aloud or in your head before turning the card.

    See every definition
    Cost-plus
    Setting price by calculating unit cost and adding a mark-up for profit.
    Unit cost
    The variable costs plus a share of fixed costs divided by output.
    Mark-up
    A fixed percentage or cash amount added to unit cost as profit to set the selling price.
    Profit margin
    A known margin built into every sale provided the cost estimate is accurate.

    Label the diagram

    Some boxes have lost their names. Pick the right name for each number.

    The diagram again, with 3 boxes numbered instead of named. A top-down flowchart. It starts with a node labelled Calculate unit cost, which branches into two nodes: Include variable costs and Include share of fixed costs divided by output. Both of these lead into a node labelled Unit cost. From Unit cost, one arrow goes to a node labelled Multiply unit cost by mark-up percentage, which leads to a node labelled Mark-up amount. Another arrow from Unit cost goes to a node labelled Add mark-up amount to unit cost, and the Mark-up amount node also feeds into this same node. This final node leads to a node labelled Selling price.

    • 1Box 1

    • 2Box 2

    • 3Box 3

    0 of 3 labelled

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