Manag., November-2017 – Q5
0. Cost - Plus pricing is not suitable for:
- Option : B
- Explanation : Inadequacies of Cost-Plus Pricing:
> This method ignores demand. The price the consumer is willing to pay is important for purposes of calculating profits. The price the consumer is willing to pay has
no relation to costs. Thus, a price based on cost is one-sided.
> This method is easy to operate, but it ignores the nature of competition in the market. Whatever price is fixed is bound to invite reactions from rival firms. But this fact the method ignores. It also ignores the future possibilities of competition as a result of the price policy.
> The cost-plus method assumes that costs can be allocated to individual products. This assumption, as is clear from the example we have taken, is unrealistic. Many costs are common and cannot be traced to individual products.
> It considers full costs. This is not always logical. For planned expansion, incremental costs rather than full costs should be taken as a basis. Also to base future prices on present or past costs is equally illogical.
> Cost-plus pricing suffers from the fallacy of circular reasoning. Sales depend upon price, production depends upon sales, costs depend upon production (because costs change as the level of production change) and price is said to depend upon cost—which completes the circle.
