Cost-based pricing sets product prices based on production costs to ensure profitability.
Cost-based pricing involves setting the price of a product based on the cost of production, particularly the cost of the parts inside it. This method ensures that the price covers the expenses incurred in creating the product and provides a margin of profit.
For example, if a smartphone is manufactured for [tex]$200 including all components, labor, and overhead, and the company wants a 20% profit margin, the price set using cost-based pricing would be $[/tex]250 ([tex]$200 cost + $[/tex]50 profit).
Cost-based pricing is essential for businesses to maintain profitability and cover their production costs effectively.
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