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Analyzing Managerial Decisions: Rich Manufacturing

In: Business and Management

Submitted By Paachig
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Analyzing Managerial Decisions: Rich Manufacturing
1)
Cost plus pricing is used by many companies for various reasons. Companies first “calculate average total cost and then mark up the price to yield a target rate of return.” (Brickly, Smith, Zimmerman, p. 211). Companies use this approach to protect themselves from increase in production costs by adding their desired rate of return. This approach is also used by many companies because of its simplicity. With supply contracts, it guarantees reimbursement of cost and producing profit with no risk of loss. (Accountingtools.com, para. 2).
2)
Potential problem with using cost plus pricing is that it ignores marginal cost and price sensitivity of customers. (Brickly, Smith, Zimmerman, p. 211). Price sensitivity is essential to pricing strategy in order to maximize profit. In addition, cost plus pricing is not responsive to market changes. (Magloff, para. 6). When customer demand and competition are not considered, companies can end up pricing their product too low where competition takes away potential profits or end up earning low profits by pricing their product too high. (Accountingtools.com, para. 3). Another problem with cost plus pricing is that it does not encourage supplier to limit expenditures. Hence, suppliers will have no incentive to reduce production costs. (Accountingtools.com, para. 3).
3)
In this case, Gina should not contest the price increase because the current contract states that Rich manufacturing will pay production costs plus a $5 markup. Although this is true, Gina can request the supplier to provide valid reasons for increase in costs and to justify the price increase. Labor is an important part of production and the current contract states the wages and benefits however it does not specify the quantity of labor. Hence the supplier can justify price increase based on number of...

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