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Chapter 25: Q25-12RQ (page 1406)

What is cost-plus pricing? Who uses it?

Short Answer

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Answer

Cost-plus pricing is an approach of setting the target selling prices of products and services, and price-setter business concerns use the same.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Price-Setter

Price setter refers to a business that has control over setting the prices of its products and services. In other words, when a business entity is not bound bymarket conditions to set prices, it is termed as price-setters.

02

Meaning and usage of cost-plus pricing

Cost-plus pricing is an approach used by business entities to set the prices of their products and services. The prices set under this approach are generally called target selling prices based on the cost-plus desired profit expectations of the company.

Cost-plus pricing approach is used by price-setter business entities.

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Most popular questions from this chapter

What makes information irrelevant to decision making?

When is nonfinancial information relevant?

Skiable Acres operates a Rocky Mountain ski resort. The company is planning its lift ticket pricing for the coming ski season. Investors would like to earn a 10% return on investment on the company’s \(270,000,000 of assets. The company primarily incurs fixed costs to groom the runs and operate the lifts. Skiable Acres projects fixed costs to be \)31,000,000 for the ski season. The resort serves about 725,000 skiers and snowboarders each season. Variable costs are about \(8 per guest. Currently, the resort has such a favorable reputation among skiers and snowboarders that it has some control over the lift ticket prices.

Requirements

1. Would Skiable Acres emphasize target pricing or cost-plus pricing? Why?

2. If other resorts in the area charge \)85 per day, what price should Skiable Acres charge?

What questions should managers answer when considering dropping a product or segment?

NaturalMaid processes organic milk into plain yogurt. NaturalMaid sells plain yogurt to hospitals, nursing homes, and restaurants in bulk, one-gallon containers. Each batch, processed at a cost of \(840, yields 300 gallons of plain yogurt. NaturalMaid sells the one-gallon tubs for \)5 each and spends \(0.14 for each plastic tub. NaturalMaid has recently begun to reconsider its strategy. NaturalMaid wonders if it would be more profitable to sell individual-size portions of fruited organic yogurt at local food stores. NaturalMaid could further process each batch of plain yogurt into 6,400 individual portions (3/4 cup each) of fruited yogurt. A recent market analysis indicates that demand for the product exists. NaturalMaid would sell each individual portion for \)0.58. Packaging would cost \(0.10 per portion, and fruit would cost \)0.11 per portion. Fixed costs would not change.

Should NaturalMaid continue to sell only the gallon-size plain yogurt (sell as is) or convert the plain yogurt into individual-size portions of fruited yogurt (process further)? Why?
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