Topic 2 - Pricing

Question 1

Advantages and disadvantages of absorption cost- plus pricing

Answer 1

• covers costs if at normal capacity
• can justify price rises
• will not maximise profit
• less incentive to control costs
• arbitrary absoprtion of overheads required

Question 2

Advantages and disadvantages of marginal cost-plus pricing

Answer 2

• no arbitrary apportionment and absorption of overheads required
• more useful for short-run decision making
• not profit maximising
• full costs may not be recovered - in long term