Absorption pricing

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absorption (noun, ab-sorp-tion, \ əbˈsɔːrpʃən \) pricing (noun, pric-ing, \ ˈpraɪsɪŋ \)

Definition: is a pricing strategy employed by companies that want to recover all their expenditures. According to this method, the price of a service or product includes the fluctuating cost of all produced items and a proportionate share of the company’s fixed costs. This strategy represents a subtype of a full cost-plus pricing approach. Absorption pricing can be calculated for a single item by dividing the organization’s overhead costs by the number of items manufactured and adding the received result to the fluctuating cost per item.

In a Sentence:

  1. Since our company manufactures a single product line, it made sense to adopt an absorption pricing model.
  2. A-Forge refused to use absorption pricing, as due to their large overhead costs, the price for their services would scare off customers.
  3. If you want to establish a profitable enterprise, you have to recover all your costs, and that’s why I recommend you use absorption pricing.

Synonyms and related words: extension pricing, rational pricing, turnkey pricing, volume pricing, retroactive pricing

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