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What is Cost plus pricing?
Cost-plus pricing is a simple pricing strategy of adding a percentage markup over the direct costs of the product such as material, labor and overhead costs to determine the final selling price. If a company sells a product for $100 which captures all its expenses, then it can add a certain markup ( Ex: 2%=$2) agreed by both buyers and sellers for a fixed profit.
What is Cost plus target rate of return on investment?
It is a pricing strategy whose ultimate goal is to get the entire return on the capital employed. It helps the business in achieving the desired level of profit if the sales continue as projected. For example, A manufacturer has invested $1 million in business and has a predefined ROI at 10% and the unit cost and expected sales are at $10 and 1000 units.
By formulae,{Target-Return Pricing = unit cost + (desired return x invested capital) /unit sales},the company must sell each unit at $20 to achieve 10% ROI.
Pros and Cons of cost-plus target rate of return on investment:
- It is easy to devise and provides direction to the management to achieve a defined rate of investment return.
- This method of pricing is easy and profitable if there is no competition. But in an oligopolistic market, it becomes difficult to achieve a preset amount of profit owing to predatory pricing by the competitors.
- The Price elasticity of demand in economics is not taken into consideration which affects sales.
- In case the quantity forecasted is left unsold then the manufacturer has to minimize the cost of production to compensate for the declining sales volume.
Cost-plus target rate of return on investment assignment help deals with all the pros and cons in a practical business situation to aid in better understanding.
Need for target rate of return on investment in a company
- Pricing objectives give an overall sense of direction of what the price must actually be. Otherwise, managers will remain clueless.
- Provides a view of the profitability in connection with investment
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