Why do many firms use cost-plus pricing for supply contracts?

Why do many firms use cost-plus pricing for supply contracts?

1. Why do many firms use cost-plus pricing for supply contracts?

2. What potential problems do you envision with cost-plus pricing?

3. Should Gina contest the price increase? Explain.

4. Is the increase more likely to be justified in the short run or the long run? Explain.

5. How will a $3 increase in the price of machine parts affect Gina’s own production decisions?

The cost of production plays a critical role in the determination of product’s selling price. Firms employ cost-plus pricing strategy to compute average total cost. They then mark-up the price to come up with the desired rate of return. The cost-plus pricing method can enable firms to compute the target rate of return and minimize ri……….………………………….des $ 5 mark-up. As a result, Rich will be required to pay the additional $3 which translates to $28 per unit.

Question 2

The cost-plus pricing method does not put into consideration the future demand for a commodity which should be given the first priority prior to the determination of the selling price and thus a serious drawback of this approach. Secon……………….fact that cost-plus pricing method does not consider the actions of the competitors can lead to failure of the product (Christie, Joye & Watts, 2003).

Question 3

Gina should not contest the price increase because the contract clearly indicates that Rich is mandated to pay Bhagat for such contract. Labor is needed to carry out produc………………..oblems due to the powerful unionized labor force.

Question 4

Although the effects of the price increase might be felt in the short run, the most valuable effect will be felt in the long-run (Christie et al., 2003). In the short run, Rich will expe…………….ments that will potentially have a positive impact on its earnings in the future.

Question 5

The $3 increase in production that is passed to Gina by the manufacturer will be passed down to the fin………………the consumer’s price elasticity.

Why do many firms use cost-plus pricing for supply contracts?