Here, the firm determines the price that would fetch its target rate of return on investment.
As per this method, the selling price can be determined by using the formula
= Unit cost +
For example, a manufacturer has invested Rs. 1,00,000 and is expecting a return of 20%. The cost of the product is assumed to be Rs. 80 per unit. He expects to sell 1,000 units. Here, the target return price can be calculated as :
Target return price = 80 +
= 80 +
= 80 + 20
= Rs. 100/- per unit