Setting the price for a product by calculating the average costs (fixed and variable, or direct and indirect) of producing the product, and adding a mark-up (percentage) for profit. It attempts to allocate all costs ie both fixed (or indirect) and variable (or direct) costs to individual units. This involves setting a projected output and calculating the total cost per unit. Fixed (or direct) costs are allocated on a logical basis eg rent on factory floor space occupied by the product. An agreed profit margin is then added. Example: A business produces 12,000 items. The total cost of producing the items is £21,000. The average cost would be £1.75. A mark-up of 20% would mean each item would be sold at £2.10.