Cost-plus pricing model

The most difficult step in price controls is arriving at a reasonable or fair price for a medicine. The literature on price controls and the tools employed are mostly from high-income countries. These include the cost-plus method, profit caps, comparative pricing, direct price negotiations and pharmaco-economic evaluations, or a combination of these tools. The cost-plus pricing model is difficult to employ in a coimtry where most suppliers are subsidiaries of international companies or importers of products from other markets. In this scenario, experience shows that it is very difficult to obtain accurate and reliable data to arrive at a determination of real costs and profits. 

The DOE report evaluated the sensitivity of the model results to changes in selected variables such as capital investment, labor, utilities, and product prices. In this analysis, all but one of the variables were held constant and the selected variable was evaluated from minus 20 percent of the assumed value to plus 20 percent, in 10 percent increments. The two variables with the largest impact on profitability were the tire tipping fees (fees paid for the disposal of scrap tires — an income for tire acquisition cost), and selling price of the products. Table 8-7 summarizes the tipping fees and product selling prices... 

Yet the figures would predict zero cost at 200,000 units, and products just aren t made in zero time. One explanation is that total output of the product, in its present design, is stopped before 200,000 units are produced. In other words, if we no longer produce Model T s and start to produce Model A s, we start on a new improvement curve at zero experience. A second explanation is that the effect of improvement in hours is masked by changes in labor wages/hr. The Model T Ford had a manufacturing progress rate of 86%. In 1910, when 12,300 Model T Fords had been buUt, the price was 950. When it went out of production in 1926 after a cumulative output of 15,000,000, the price was 270 200 in constant prices plus inflation of 70. 

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