What is Cost Plus pricing policy? State two advantages and two disadvantages of it.

Cost Plus Pricing Policy — The basic idea underlying this approach is that the selling price of a product must cover its full cost and yield a reasonable margin of profit. The margin (called 'mark up') may be a fixed amount per unit or a percentage of cost. Therefore, cost plus pricing is also known as 'mark up pricing'.

The formula used is:

Selling Price = Total Cost per Unit + Desired Profit per Unit

Two Advantages:

1. Full coverage of costs — It ensures that all costs (production and marketing) are fully recovered, with a reasonable margin of profit added on top.
2. Simple, logical and safe — It is the most widely used and safest approach to pricing. The method is easy to apply and can be defended on moral grounds.

Two Disadvantages:

1. Ignores demand and competition — The method ignores the nature and level of demand in the market, and fails to reflect competition. The resulting price may be out of line with market conditions.
2. Difficulty in cost determination — It is often difficult to accurately determine the cost per unit due to common overheads and joint products. The method involves arbitrary allocation of costs.