Setting the price of a product to cover all variable (or direct) costs plus a percentage mark-up as a contribution towards fixed (or indirect) costs and profit. Variable cost-plus pricing is most appropriate when output is changing, because if output changes, fixed costs per unit changes, but variable costs per unit stay the same (unless the business is affected by gains / losses in purchasing economies of scale). In the short-run as long as a business can pay its variable costs it can survive. In the long run, it will need to cover total costs. If enough units are sold, then total contribution should cover fixed costs. This depends upon how many products the business is likely to sell. Example: A business produces 18,000 units. Variable costs are £63,000. Fixed costs are £190,000. Calculate the lowest price it can charge to survive: a) in the short-term b) in the long-term. a) £63,000 / 18,000 = £3.50 in order to cover variable costs. b) £153,000 / 18,000 = £8.50 assuming costs and output or sales volume remain the same.