As a matter of fact, businessmen are reluctant to tell economists how they calculated prices and to discuss their relations with rival firms so as not to endanger their long-run profits or to avoid government intervention and maintain good public image. When it is not possible to gather market information for the product or it is expensive, cost- plus pricing is an appropriate method. The following are advantages to using the cost plus pricing … When customers go shopping, they are balancing the need they have for specific items with the cost of obtaining that item. Hasty Hare sells one model of sneaker, the Fleet Foot, and has the following production and operating costs:The variable cost of production for the Fleet Foot sneaker is Let's start with the formula for calculating a company's breakeven sales volume: Fixed costs/(Selling price - Variable costs).The break-even production volume for Hasty Hare is as follows: Now, since the company has reached its break-even point, suppose Hasty Hare wants to establish its market share, so it becomes more aggressive by reducing its selling price. 1. Advertisement: Advantages : 1. It works the opposite if production costs increase. Consumers can be skeptical of pricing fluctuations and it erodes brand trust.If costs of production decrease, cost plus pricing suggests that pricing should decrease. Cost Plus Contract Disadvantages. A markup percentage is added to the total cost to determine the selling price. The firm finds out the average direct costs (AVC) by dividing the current total costs by current total output. A company's pricing strategy is never permanent. One of the biggest decisions a business can make is whether to value pricing or cost based pricing for their product or service. Then, you lose out on profits. Cost Plus Contract Advantages. They also raise the price when costs rise during a boom. 6. A business calculates the cost to create products. Even government contracts ask for cost plus pricing.Cost plus pricing throws money out the door. In case of marketing majority of time company prices its products either according to the cost of a product or according to demand and supply of the product but for some products companies use a different method called value based pricing. The price which a firm will normally quote for a particular product will equal the estimated average direct costs of production plus a costing-margin or mark-up. When the firm is unable to forecast the demand for its product, the cost-plus method can be used. 5.
What if a company has too much inventory on hand at the end of a selling season? It’s a popular method of pricing because of its simplicity. In these circumstances, indeed, it is likely that the first will coincide roughly with the third, for the capacity of the plant will depend on the expected future sales. The usual formula for costing-margin (or mark-up) is, where M is mark-up, P is price and AVC is the average variable cost and the numerator P-AVC is the profit margin. 8. At this price, the company sells an additional 3,000 pairs and makes a profit of After selling more pairs of Fleet Foot at $95 and firming up the brand name, the company could gradually increase the selling price back to the original target price of Marginal cost pricing has the following advantages:The disadvantages of marginal cost pricing are as follows:A marginal cost pricing strategy is an effective tool when used in the short-term. Let's look at some of the pros and cons of each. Cost-plus pricing is suitable in such cases where the nature and extent of competition is unpredictable. Raw materials and sales commission are variable costs or costs that change from period to period. Suppose the firm chooses OQ level of output. He has been published in magazines such as "Reaching Out" and "Spa Search." Constant in nature – Variable costs fluctuates from time to time, but in the long run, marginal costs are stable. Effective budgetary planning relies on the provision of adequate information to the individuals involved in the planning process. In the book, “Capon’s Marketing Framework,” Noel Capon writes that companies are prone to pricing too high or too low with cost-plus pricing. In markets where customers are counting every penny before making a buying decision, he shows that prices are often too high. MC is its corresponding marginal cost curve.
The cost-plus method offers a guarantee against loss-making by a firm. If the cost of a book is Rs 100 and its price is Rs 125, If we solve equation (1) for price, the result is Once this price is chosen by the firm, the costing-margin will remain constant, given its organisation, whatever the level of its output. The business executives are convinced that the price fixed will cover the cost.
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