Cost - Plus pricing is not suitable for :
Profit Maximising
Profit maximising — option 2.
What cost-plus pricing is. Price is set by taking the cost per unit and adding a fixed percentage or absolute margin :
\(\text{Price}=\text{Average cost}+\text{Mark-up}\)
It is the commonest pricing method in practice because it is simple, it is defensible to a customer or a regulator, and it guarantees cost recovery if the sales forecast holds.
Why it cannot maximise profit. Profit is maximised where marginal revenue equals marginal cost. That condition requires knowledge of the demand curve — how buyers respond to price. Cost-plus pricing looks only at cost and ignores demand entirely, so any coincidence with the profit-maximising price is accidental.
| Defect | Consequence |
|---|---|
| Ignores elasticity of demand | Where demand is inelastic the firm underprices and gives away profit; where elastic it overprices and loses volume |
| Ignores competitors’ prices | The price may be uncompetitive from the day it is set |
| Circular reasoning on cost | Average cost depends on volume, and volume depends on price — so the cost figure needs an assumed sales level, which the price itself determines |
| Perverse in a downturn | Falling volume raises average fixed cost, which raises the computed price, which further reduces volume |
Why the other three are suitable.
| Situation | Why cost-plus fits |
|---|---|
| Product tailoring | A one-off item made to a customer’s specification has no market price to refer to, so cost plus an agreed margin is the only workable basis |
| Monopsony pricing | With a single powerful buyer — defence procurement is the standard case — contracts are routinely written on a cost-plus basis, since the buyer will not accept a price he cannot audit |
| Public utility pricing | A regulated utility is allowed to recover its costs plus a fair return on the capital employed; this rate of return regulation is cost-plus by design |
The pattern. Cost-plus is used wherever there is no competitive market price to guide the seller — a bespoke product, a single buyer, or a regulated monopoly. It is unsuitable precisely where the firm is free to exploit demand, which is what profit maximisation requires.
Hence, the answer is Profit Maximising.
Similar Questions
Find the most appropriate sequence of life-cycle of price for a product, from the initial stage to the mature stage.
After determining its pricing objectives, what is the next logical step a company should take in setting its pricing policy ?
The practice of selling below cost, with an intention to destroying the competitor is referred to as :
Match the items of List - I with that of List - II and suggest the correct code :
List - I (Pricing Strategies) List - II (Explanations) (a) Customary pricing (i) Ending a price with 99 paise (b) Skimming (ii) pricing a product based on perceived expectations of customers (c) Penetration pricing (iii) Setting a high price which gradually reduces as competitors enter the market (d) Psychological pricing (iv) Offering at a low price for a new product during its initial offering Code :
Find the most appropriate sequence of life-cycle of price for a product, from the initial stage to the mature stage.
The practice of selling below cost, with an intention to destroying the competitor is referred to as:
After determining its pricing objectives, what is the next logical step a company should take in setting its pricing policy?
When the Companies pay less attention to its own costs or demands and bases its price largely on competitors’ prices, then it is known as :
Match the items of the List-I with those of the List-II and suggest the correct code from the following:
List-I List-II i. Loss Leader a. Locational price differentials ii. Unchanged Pricing b. Products with high initial demands iii. Basing Point Pricing c. Product line pricing iv. Skimming Pricing d. Oligopoly pricing Codes:
Which one of the following will be the appropriate pricing strategy for a new product expecting an expanding market?
Important Questions from Pricing decisions
Pricing practice of setting a price target and then developing a product that would allow the firm to maximise total profit at that price is called:
- Which of the following are the informal pricing methods ?
I. Cost plus
II. Competitive
III. Rate of return
IV. Trial and error
Codes : Which among the following is not an internal factor in pricing decisions?
Find the most appropriate sequence of life-cycle of price for a product, from the initial stage to the mature stage.
After determining its pricing objectives, what is the next logical step a company should take in setting its pricing policy ?
