Analyzing Managerial Decisions: Rich Manufacturing
Introduction
Cost-plus pricing is one way of determining price. In this method companies calculate the
production cost and the desired profit margin which results in a mark up on the production cost
which is known as the cost plus pricing.
Why do many firms use cost-plus pricing for supply contracts? Companies prefer this
method because it’s very simple, requires no market research and also doesn’t consider
consumer demands or the competitor’s strategies.
What potential problems do you envision with cost-plus pricing? It’s out of touch with
reality as the profit margins or the marks on the production costs are done arbitrarily without
considering the consumers demands and how much they are willing to pay or the size of the
market and the strategies of the competitors. It’s one way of discouraging sales as there is little
data on what the customer’s idea of value is, customers only purchase items they consider to be
valuable to their needs.
2 Economics
Should Gina contest the price increase? Yes. Bhagat should at shoulder some of the costs
incurred because of the increment i.e. the total 30% increase should not be passed to Rich
manufacturing but at least Bhagat should shoulder 10% and pass the other 20% to Rich
manufacturing i.e. increase the cost of its machine by $2 only.
Is the increase more likely to be justified in the short run or the long run? The increase in
the labor cost will be justified in the long run. Better prospects in the Rich manufacturing
company will attract new and more specialize staff who will eventually improve the quality of its
products which will attract more sales in the long run. ( Sullivan , Sheffrin, 2003).
How will a $3 increase in the price of machine parts affect Gina’s own production
decisions?
The cost of maintenance will increase by 30% as the current operational expenses less labor
are $10 per part. The full impact of the increase will be felt by Rich manufacturing group as
Bhagat has passed all the extra increment to the consumer, i.e. Rich manufacturing group. The
production costs will increase by 30% and Gina has to contend with these increment or source
for another supplier. (Sudhir, 2009)
To conclude, Cost plus is not the best method of determining the prices of products. Customers
play a big role in the determination of prices. A little research can make a lot of difference, in
fact, what customer’s value may not necessarily be very costly but the consumer buying
patterns must be established before the increases are implemented.
3 Economics
References
Sullivan , Sheffrin, S (2003). Economics: Principles in action. Upper Saddle River, New Jersey
Pearson, Prentice Hall.
Sudhir, J. (2009). Managerial Economics. Pearson Education.
