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 :
Select the correct sequence of steps in setting a pricing policy:
(a) Determining Demand
(b) Analysing competitors' costs, prices and offers
(c) Selecting the Final Price
(d) Selecting the Pricing Objective
(e) Estimating costs
(f) Selecting a pricing method
Codes:
The price setting method most closely corresponding to the concept of product positioning is:
A company prices a 2 litre bottle of its mineral water at ₹ 30 but 60 ml of the same water in a moisturizer spray for ₹ 75. This is an example of which one of the following pricing practices?
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 :
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?
Find the most appropriate sequence of life-cycle of price for a product, from the initial stage to the mature stage.
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 is the characteristic of price?
In which of the following price adjustment strategies. a company reduces prices to reward customer responses such as volume purchases, paying early or promoting the product?
The consumer's price sensitivity is / are influenced by
A. Who bears the cost
B. What percentage of total expenditure does the product represent
C. Who bears the cost and type of retailer from where customer purchases
D. Consumption of product by the customer
E. Knowledge about the product
Choose the most appropriate answer from the options given below:
- Which of the following are the informal pricing methods ?
I. Cost plus
II. Competitive
III. Rate of return
IV. Trial and error
Codes :
