'Golden Ice Cream Limited' is a manufacturer and supplier of ice creams. They set the price of their various ice cream varieties based on manufacturing estimates. The company had been earning good profits over the last many years as there were no competitors in the market for their ice creams. However, during the last year, the company incurred heavy losses. On investigation they noticed that while setting the prices, they did not take into account the actions of competitors, which may have led to these losses. Additionally, the pricing method used by the company includes sunk cost and ignores opportunity costs. (a) Identify the pricing method used by the company. (b) Explain any two advantages of the pricing method identified in (a) above.

Question

Accepted Answer

(a) The pricing method used by Golden Ice Cream Limited is **Cost-plus pricing**. In this method, the manufacturer charges a price to cover the cost of producing a product plus a reasonable profit. The company set prices based on manufacturing estimates and did not take into account competitors' actions, which led to losses.

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

1. The company knows exactly the amount of expenditure that has incurred on making a product and therefore can add profit margin accordingly, which helps in achieving the desired revenue. For example, if expenses are Rs. 1000 and the desired profit margin is 10%, the product is sold 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. No complex calculations or market analysis is needed.