Question

State two disadvantages of Cost plus pricing policy.

Answer 1

1. It is very often difficult to determine accurately the cost per unit due to common overheads and joint products. The method involves arbitrary allocation of costs in such cases.
2. The method ignores the nature and level of demand. The resulting price may, therefore, be out of line with market conditions.
3. It fails to reflect competition in the market.
4. The mark-up on the cost of the product is not fixed but may change with changes in demand. In practice, the rule of thumb methods are used to determine the mark-up.