Commercial Applications
Answer
Two Advantages of Cost Plus Pricing:
- Full coverage of costs — It ensures full coverage of all costs and helps in achieving a reasonable return on capital employed by adding a fixed mark-up.
- Simple, safe and logical — It is the most widely used and safe approach to pricing. The method is logical, easy to apply, and can be defended on moral grounds. It also discourages cut-throat competition.
Two Disadvantages of Cost Plus Pricing:
- Ignores demand and competition — The method ignores the nature and level of demand and fails to reflect competition in the market. The resulting price may be out of line with market conditions.
- Difficulty in cost determination — It is very often difficult to determine accurately the cost per unit due to common overheads and joint products. The method involves arbitrary allocation of costs.
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