Which pricing method is described as setting price to cover only marginal costs?

Which pricing method is described as setting price to cover only marginal costs?

• A. Full cost pricing
• B. Marginal cost pricing
• C. Mark-up pricing
• D. Target return pricing

Answer: (B)

Setting price to cover only marginal costs means charging a price equal to the additional cost of producing one more unit—the variable cost. This approach ignores fixed costs in the price, so the unit itself doesn’t contribute to covering those fixed charges; recovery of fixed costs relies on volume or other pricing strategies over time. It’s often used for short‑term decisions or when there is spare capacity, where the priority is to ensure each extra unit at least covers its incremental cost and avoids a loss on that unit. This differs from full cost pricing, which includes fixed costs in the price; mark-up pricing, which adds a profit margin on cost; and target return pricing, which aims for a specific return on investment.

Setting price to cover only marginal costs means charging a price equal to the additional cost of producing one more unit—the variable cost. This approach ignores fixed costs in the price, so the unit itself doesn’t contribute to covering those fixed charges; recovery of fixed costs relies on volume or other pricing strategies over time. It’s often used for short‑term decisions or when there is spare capacity, where the priority is to ensure each extra unit at least covers its incremental cost and avoids a loss on that unit.

This differs from full cost pricing, which includes fixed costs in the price; mark-up pricing, which adds a profit margin on cost; and target return pricing, which aims for a specific return on investment.