Cost Recovery Theory

Cost Recovery Theory suggests that a firm’s pricing should at least cover its costs to produce a good or service, including both variable costs (directly tied to production) and fixed costs (overhead expenses). The goal is to ensure the business can sustain operations and avoid losses. Once costs are recovered, additional sales can lead to profit. This approach emphasizes the importance of understanding all expenses involved in delivering a product, guiding firms to set prices that ensure financial stability and long-term viability.