Final answer:
The statement is true as the markup percentage in cost-plus pricing varies based on how costs are defined, which affects the pricing strategy and profit margin of a firm.
Step-by-step explanation:
The statement is true. The general formula for calculating the markup percentage in cost-plus pricing to achieve a target return on investment (ROI) indeed varies based on the definition of cost. When setting prices using cost-plus pricing, the total cost (sum of fixed and variable costs) forms the basis for the calculation. From this, a markup percentage is added to achieve the desired ROI. The markup percentage is determined by how much profit a firm aims to make over its costs, which will influence its pricing strategy and ultimately impact its profit margin.
For example, if a company has an average cost for a product and wishes to maintain a specific ROI, it would add a percentage markup to the average cost to determine the final price. If the market price is above the calculated average cost (inclusive of markup), the average profit, and thus total profit, will be positive. If it is below, then profits will be negative. Therefore, the definition of cost (covering fixed, variable, average total, and marginal costs) plays a crucial role in setting the right markup percentage to meet the profitability targets. This approach also demands an understanding of the long-run cost structure of the firm and the market structure it operates within.