Advantages and Disadvantages of Cost plus Pricing

Cost plus pricing method refers to that pricing strategy under which the company adds all costs which has gone into making a product like raw material, labor and then firm add some percentage of profit margin to arrive at a price for a product. Given below are some of the advantages and disadvantages of cost plus pricing –

Advantages of Cost plus Pricing

  1. Biggest advantage of this is that company knows exactly the amount of expenditure that has incurred on making a product and therefore they can add profit margin accordingly which helps in achieving the desired revenue for a firm. So for example if a company has incurred expenses of $100 and they want to earn profit margin of 10 % than the company will sell the product at $110
  2. It is the simplest method to decide the price for a product because one has just to add up all the cost and then add profit which you want to earn which will give the price for a product.
  3. Since company is using its own data for deciding cost which makes it easier for a company to evaluate the reasons for escalations in expenses and therefore it can take corrective action immediately

Disadvantages of Cost plus Pricing

  1. This method does not take into account the future demand for a product which should be the base before deciding the price of a product and therefore a serious limitation of this method.
  2. It also does not taken into account the competitor actions and its effects on pricing of the product, because in today competitive world if one solely depends on cost plus pricing it can lead to failure of company’s product in the market.
  3. It can result in company overestimating the price of a product because this method include sunk cost and ignores opportunity cost also while calculating cost and there is element of personal bias while deciding the profit margin which is to be added for a product
0 comments… add one

Leave a Comment

Related pages

direct quotation to indirect quotationvertical vs horizontal analysisautocratic leadership stylesadvantages of audit programmenationalization advantages and disadvantageswhat is planned economy definitionmerits of market economyadvantages of debenturesadvantage and disadvantage of joint venturecheque definedisadvantages of comparative advantage theoryconcept of diminishing returnsfdi full formdisadvantages of a joint venturepayback method of investment appraisaldifference between price discrimination and price differentiationdifference between capitalism and mixed economybenefits of managerial accountingwhat is the full form of kpmgmarket economy characteristics advantages disadvantagesdefine marginal costingcharacteristics of fmcgsalaries payable journal entryintraday traderadvantages and disadvantages of markup pricingdeflation cyclereverse stock split advantagesadvertising merits and demeritsthe disadvantage of globalizationwhat is meaning of consigneeexamples of primary industryexamples of direct taxesmeaning of wholesaler and retailerdisadvantages of price floorpricing strategies gcsefutures advantages and disadvantagesaccounting materialitywhat does proprietors meanwhat are examples of inferior goodsinfosys company websiteescrow account meaningfx direct quotedeflation advantages and disadvantagesimplications of capmcost of deflationrediscounting of billstrade discount examplelow of diminishing marginal utilityurbanization advantagescharacteristics of oligopoly market structurenormal and inferior goods in economicswhat is a predeterminationwhat is vertical mergerunearned revenue entryvertical analysis financial statementscapm in financial managementskimming in marketingcertificates of deposits in indiaunearned income entryadvantage of socialismdifference between micro and macro economics pdfthe principle of absolute advantageskimming pricing examplescapital budgeting decisions examplesproprietorship ratiobills of discountingmonopolistic marketdiminishing returns examplesdisadvantage of oligopolywhat is the difference between complimentary and complementaryfifo method of inventorytrade discount accountingexchange rate quotationsexample of a monopolistic competition companydirect and indirect currency quotesdrawings accounting definitioncarriage inwardsmonopolistic economymeaning of laf