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Rich Manufacturing

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Submitted By perkesb4
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Rich Manufacturing
Gordon Perkes

Why do many firms use cost-plus pricing for supply contracts?

Cost-plus pricing is a pricing method used by companies to maximize their rate of returns. It is also known as markup pricing. Many firms use cost-plus pricing because it is one of the more common methods of pricing. “Firms that use this technique calculate average total cost and then mark up the price to yield a target rate of return”. I would say the biggest reason for cost-plus pricing is that it guarantees a profit. Even if the price of the part was reduced, it is built in so that a profit would be made. Unit cost = variable cost + (fixed costs/unit sales)

What potential problems do you envision with cost-plus pricing?

Even though cost-plus pricing guarantees a profit, it can be very ineffective. It does not take into consideration what the consumer is doing, nor its competition. If a firm agrees to pay cost-plus pricing, they are guaranteeing a profit to the vendor no matter how the company is managed. By keeping this pricing model it does not give the vendor any incentive to maximize its production, because it is already guaranteed a profit. It is actually taking away from the customer. What is being done with the money between what the customer is paying and the return the vendor is making? It brings up the question, is this benefiting the customer in the best way possible?

Should Gina contest the price increase? Explain.

After proper research I feel that Gina should accept the price increase. Price increases are normal and happen consistently. There is more to this equation than just the price. Loyalty to a good product and company. There is however another side to this. Since there is already a contract already in place, Gina is required to pay $25 per part. There was not enough information given to determine if there is a clause in the contract…...

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