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Cost-plus pricing numerical

Short answer

Fixed overhead per bag = Rs 60, full cost = Rs 220. With 35% mark-up, selling price before tax = Rs 297. Adding 13% VAT, customer pays Rs 335.61.

A startup makes handmade bags. Direct material is Rs 120 per bag, direct labour Rs 40 per bag, and fixed overhead is Rs 6,00,000 per year. Expected output is 10,000 bags per year. The owner wants a 35% mark-up on full cost. (a) Find the selling price before tax. (b) Find the price the customer pays if 13% VAT is charged. (c) Name two other pricing methods.

Given

Material = Rs 120, labour = Rs 40, fixed overhead = Rs 6,00,000, output = 10,000 bags, mark-up = 35%, VAT = 13%.

(a) Selling price before tax

Overhead per bag:

6,00,00010,000=Rs 60\frac{6{,}00{,}000}{10{,}000} = \text{Rs } 60

Full cost per bag:

120+40+60=Rs 220120 + 40 + 60 = \text{Rs } 220

Selling price with 35% mark-up:

220×1.35=Rs 297220 \times 1.35 = \text{Rs } 297

(b) Price paid by the customer

297×1.13=Rs 335.61297 \times 1.13 = \text{Rs } 335.61

(The VAT of Rs 38.61 is collected for the government, not income of the startup.)

(c) Other pricing methods

  • Competition-based pricing: price set near rival prices.
  • Value-based pricing: price set by the worth customers see in the product.
  • (Also: penetration pricing, skimming, freemium.)

Note that the cost per bag of Rs 220 holds only if 10,000 bags are sold; at lower volume the overhead per bag rises.

Answer: Selling price = Rs 297 per bag; with 13% VAT the customer pays Rs 335.61.

✓ Answer checked by Claude Opus 5.5 (high effort)

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