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The paradox is that, “while cost plus pricing is devoid of any theoretical justification, it is widely used in practice”. Discuss the possible justification for its...

      

The paradox is that, “while cost plus pricing is devoid of any theoretical justification, it is widely used in practice”.
Discuss the possible justification for its use.

  

Answers


Kavungya
Several reasons can be advanced in favour of computing target sell prices by means of cost
plus formulae, even if the prices are later modified firstly, the decision maker is faced with
uncertainties. The use of cost-pus formulae enables the decision-maker to absorb some of
these uncertainties and come up with a price that will be acceptable given the constraints at hard.

Secondly, cost may be reviews as abase from which the price setter moves, guarding
against the possibility of setting the price too low and incurring losses. Cost-plus pricing will
not guarantee against loss making; for instance, there are problems of volume estimating.
However, these will point the price setter in the right direction.

A third explanation of the popularity of cost-based price is the estimates of the
company's own cost may help the decision – maker to predict either competitor's cost
or a competitor's price. For example, if a company is operating in an industry where a 30%
mark-up is the norm, then the company may be able to assume that this pattern will hold
for new products and thereby either to predict competitor price or to price in such a way as
to gain quick acceptance of a new product line.

-- Motivation & Autonomy
The main reason is that information is rarely (if ever) available to allow an approach based
on marginal cost and marginal revenue.
Kavungya answered the question on May 6, 2021 at 10:01


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