Definition of Absorption Pricing
An approach used to set prices where all of the expenses are included. Here, the price of an item involves each variable expense that derives from it and a portion of the established expenses.
Description of Absorption Pricing
In order to calculate the price for a single entity, divide the sum of the entire aerial and every organizational expense by the number of entities made. Then, add that total to the variable expense for every entity.
For instance, suppose a company plans on having $100,000 in arial expenses and $50,000 in organizational expenses. If they plan on selling about 15,000 entities with a variable expense of $5.00 device, then the fully-absorbed price comes out to $15 per entity.
Advantages of Absorption Pricing
This pricing approach is known for its simplicity and greater chance to make a profit. It’s easy since it’s just based on a formula that doesn’t require a trained individual to solve it. Additionally, you’ll most likely earn a profit if the price that came from what your assumed budget is, is true.
Disadvantages of Absorption Pricing
It doesn’t take into consideration the competition, price elasticity, and often times, the correct budget. As a result, their prices won’t be competitive to the ones of their rivals and may even be priced much higher or lower, thus losing profit.