Full cost pricing method in export
In a full cost pricing method, the export price should be able to recover all costs, both fixed and variable costs. In addition to these, the export pricing takes into account the factor of desirable profit. Thus in this approach, export price is composed of Average Fixed Cost, plus Average Variable Cost, plus Desirable profit.
This approach is also known as cost plus approach or absorption approach.
Advantages of full cost pricing
The following are some of the advantages of full cost pricing method.
1. Full cost pricing method is very simple in the calculation of price of export.
2. Assurance of reasonable return to the exporter.
3. Price competition can be avoided in full cost pricing as all exporters, more or less, use the same pattern of pricing.
4. No possibility of loss from export because all costs are recovered.
5. Cost data collection can be avoided in full cost pricing, because all cost data required for the purpose is available with the exporting fir.
Disadvantages of full cost pricing
The following are some of the disadvantages of full cost pricing method.
1. The so called advantages are only deceptive. Full cost pricing completely ignores all aspects of competition and strategy adopted by competitors.
2. It neglects the demand factor.
3. Calculation of average fixed cost is difficult, particularly in the multi-product firm.
4. Full cost pricing considers only historical costs data and not the future cost data for allocation of costs to products.
5. This method is based on circular reasoning: i.e., price determines the quantity demanded; price charged is dependent upon cost per unit and the cost, in turn depends upon the quantity demanded.
6. It ignores marginal or incremental cost and uses average costs instead.
In spite of its drawbacks, full-cost pricing is useful in product tailoring, products designed according to buyer’s specifications in the foreign market