Question

‘Golden Ice Cream Limited’ is a manufacturer and supplier of ice creams. They set the price of their various ice cream varieties based on manufacturing estimates. The company had been earning good profits over the last many years as there were no competitors in the market for their ice creams. However, during the last year, the company incurred heavy losses. On investigation they noticed that while setting the prices, they did not take into account the actions of competitors, which may have led to these losses. Additionally, the pricing method used by the company includes sunk cost and ignores opportunity costs.

1. Identify the pricing method used by the company.
2. Explain any two advantages of the pricing method identified in (a) above.

Answer 1

1. Cost-Plus Pricing is the way the company sets its prices. With this approach, the price of a good is set by adding a fee to the cost of making it. Golden Ice Cream Limited set its prices based on estimates of how much it would cost to make the product. This is an example of a cost-plus pricing approach.
2. Two advantages of Cost-Plus Pricing are:
   1. Ensures Profit Margin: The company ensures a consistent profit on every unit sold by applying a fixed markup to production costs. This makes it easy to plan for and guess when money will be stable.
   2. Simplicity: The method is simple to use: determine the cost to produce an item and add a fixed price. It’s an easy way for businesses to set prices because it doesn’t require a lot of complicated market study.