BUSINESS ECONOMICS COURSEWORK Essay Example | Topics and Well Written Essays - 2000 words

BUSINESS ECONOMICS COURSEWORK - Essay Example With cost-plus pricing, the firm can just increase the price. Price increase is possible due to the fact that at some point, the production costs of a product may not be clear in advance. This literally may have significant advantage in cases of supply contracts. Although cost-plus pricing strategy may have advantages, it also has remarkable drawbacks which include the following: ignoring the demand, image, and market positioning; favouring historical accounting costs rather than replacement value; applying standard output level to allocate fixed costs; offering few incentives for efficiency, as costs are passed off to customers; ignoring the role of customers and the value they drive; and creating a competitive disadvantage using average costs (Brickley, Smith & Zimmerman, 2009; BPP Learning Media, 2009, p.302; Holden & Burton, 2010). Perhaps, the most striking of all of these is on how the costs are clearly passed off to customers. Cost-plus pricing may therefore not that competitive in a marketplace where there are new entrants, especially those willing to compete with price by and lowering down their price offerings to generate a market share or acceptance. At some point, cost-plus pricing may trigger a less affinity (less demand) for a certain service or product offering in the long run as competition arises. Cost-plus pricing is a safer pricing strategy on the part of Bhagat Incorporated due to production costs that may not be clear beforehand. It is a natural practice that when a manufacturing company set the price of a good, the cost of labour is always taken into account (Brickley, Smith & Zimmerman, 2009; Krauss & Johnson, 2006, p.211; Campbell, 2003, p.167). Labour costs are categorised either direct or indirect (Sears, Sears & Clough, 2010, p.46). The indirect labour costs can be reduced (Appelbaum, 200, p151; Roderhorst, 2009, p.80). If Bhagat has so much increase in its indirect labour costs, then this could be