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Commercial Applications

Mention two advantages and two disadvantages of cost plus pricing strategy.

Marketing Mix

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Answer

Two Advantages of Cost Plus Pricing:

  1. 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.
  2. 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:

  1. 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.
  2. 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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