This method is used primarily by companies that either have a lot of capital or have a monopoly on the market and when an investor requests a specific return on their investment.
The formula is: Target-return pricing = unit cost + [(desired return on investment * invested capital) / expected unit sales][2] Rate of return pricing enables firms to better assess the profitability of a product or service.
It enables the cost of invested capital to be accounted when the setting price per unit and can be used to forecast the end monetary return of an exercise.
It also helps the company in reaching certain profit goals' while maintaining liquidity.
[3] Additionally, if market conditions are stable, forecasts for returns will be extremely accurate as a certain target is being used in pricing achievements are solely dependent on sales.