Certified Professional Public Buyer (CPPB) Practice Test

Cost-based pricing involves adding a margin of profit to what types of costs?

1. Overhead and fixed costs

2. Labor, material, and overhead costs

3. Variable and operational costs

4. Marketing and sales costs

The correct answer is: Labor, material, and overhead costs

Cost-based pricing is a method where the total costs incurred in producing or providing a product or service are calculated, and a profit margin is added on top of these costs to determine the selling price. The correct answer identifies that labor, material, and overhead costs are crucial components of total costs for this pricing strategy. Labor costs refer to the expenses associated with compensating employees who contribute directly to the production or service provision. Material costs entail the expenses related to the raw materials and supplies used in the production process. Overhead costs represent the indirect expenses that are not directly tied to a specific product or service but are necessary for general operations, such as utilities, rent, and administrative expenses. Together, these costs form the basis upon which businesses determine their pricing, ensuring that all necessary expenditures are accounted for before applying the desired profit margin. By focusing on labor, material, and overhead costs, organizations can set prices that reflect their actual expenditure and desired profitability, allowing for a sustainable business model.