ACCA PM Syllabus C. Decision-making Techniques - Evaluating a Decision to increase Production and Sales - Notes ^{5 / 6}

Cost-plus

Cost-plus pricing involves establishing the unit cost and adding a mark-up or sales margin.

Full cost-plus pricing is a method of determining the sales price by calculating the full cost of the product and adding a percentage mark-up for profit.

• Advantages of full cost-plus pricing

  • It is a quick, simple and cheap method of pricing which can be delegated to junior managers.

  • Since the size of the profit margin can be varied, a decision based on a price in excess of full cost should ensure that a company working at normal capacity will cover all of its fixed costs and make a profit.

• Disadvantages of full cost-plus pricing

  • It fails to recognise that since demand may be determining price, there will be a profit maximising combination of price and demand.

  • There may be a need to adjust prices to market and demand conditions.

  • Budgeted output volume needs to be established. Output volume is a key factor in the overhead absorption rate.

  • A suitable basis for overhead absorption must be selected, especially where a business produces more than one product.

  • There is no attempt to establish optimum price