ICAEW BIP · Chapter 4 · Question 10 of 11
Which of the following is a weakness of full cost-plus pricing?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) It ignores the effect of price on demand and competitors' prices
Explanation
Cost-plus pricing is simple and, if budgeted volumes are achieved, makes sure all costs are covered. Its main weakness is that it looks only inward at cost, ignoring customers' willingness to pay and competitors' prices. It is widely used for services and needs no demand data, which is part of why it is popular.
More Pricing decisions MCQs
- Q1The full cost of a product is £64 per unit. The company sets prices using a mark-up of 25% on full cost. What is the selling price?
- Q2A product sells for £150, which gives a profit margin of 20% on the selling price. What is the equivalent mark-up on cost?
- Q3A company uses marginal cost-plus pricing with a mark-up of 60%. The variable cost of a product is £36 per unit and the fixed cost per…
- Q4Lynton Ltd is developing a new product. Market research shows a competitive selling price of £220. The company requires a profit margin of…
- Q5When a company raised the price of a product from £20 to £22, monthly demand fell from 5,000 units to 4,400 units. Using the original…