Which statement about average cost-pricing is true?
Multiple Choice
A It does not take the demand curve into account when setting prices.
B It is more profitable if actual sales are lower than expected.
C It can be used to set a price without an estimate of the quantity to be sold.
D It can result in losses if actual sales are higher than expected.
The correct answer and explanation is :
The correct answer is C: It can be used to set a price without an estimate of the quantity to be sold.
Explanation:
The statement refers to cost-plus pricing, which is a pricing strategy where a firm sets the price of a product by adding a fixed margin or markup to the cost of producing the product. This method doesn’t require estimating the quantity of products to be sold in advance. Instead, it focuses primarily on covering the production costs and achieving a desired profit margin, regardless of how many units are sold.
Let’s break down the other options and why they don’t apply:
- A: It does not take the demand curve into account when setting prices.
- This is true in the sense that cost-plus pricing does not directly consider how consumer demand will affect the price. Instead, it is based on the cost of production plus a markup. However, this is more of a characteristic of the pricing method rather than an explanation of why “C” is correct.
- B: It is more profitable if actual sales are lower than expected.
- This is incorrect. If actual sales are lower than expected, the company may not cover its costs or achieve its target profit. With cost-plus pricing, profitability is more directly related to the price set, not the volume of sales. If fewer units are sold, the firm may not generate enough revenue to cover fixed costs or reach its profit goals.
- D: It can result in losses if actual sales are higher than expected.
- This is also incorrect. If sales are higher than expected, the company typically benefits because it has more units to sell at the predetermined markup. The loss would generally not occur as a result of higher sales under cost-plus pricing. The issue could arise if the markup is set too low to cover fixed costs or if other factors like production capacity come into play.
In conclusion, cost-plus pricing is a method that sets prices by focusing on covering costs and adding a profit margin, without needing to forecast the actual quantity of products to be sold. This makes option C the correct answer.