Aircon Ltd. manufactures and sells desert coolers with various unique features. There is no competitor of Aircon Ltd. in the market. So they decided to sell these at a high price. Inspite of having unique features its sale was not picking up. They tried to find out the reason for this. After market research they found that to raise their market-share, they have to revise their pricing method. The company decides to adopt a pricing method based on manufacturing estimates which should cover the cost of producing the coolers plus a reasonable profit. (a) Identify the pricing method Aircon Ltd. decides to adopt. (b) State one advantage and one disadvantage of this pricing method.

Question

Accepted Answer

(a) The pricing method used by Golden Ice Cream Limited is **Cost-plus pricing**. The company set prices based on manufacturing estimates which cover the cost of producing a product plus a reasonable profit. This method is the most common technique where the manufacturer charges a price to cover the cost of producing a product plus a reasonable profit.

(b) Two advantages of cost-plus pricing are:

1. The company knows exactly the amount of expenditure incurred on making a product and can add a profit margin accordingly, which helps in achieving the desired revenue. For example, if a company has incurred expenses of Rs. 1000 and wants a profit margin of 10%, it will sell the product at Rs. 1100.

2. It is the simplest method to decide the price for a product because one has just to add up all the costs and then add the desired profit, which gives the price for a product.