Association of Chartered Certified Accountants (ACCA) Certification Practice Test

How is the cost-plus pricing curve represented graphically?

1. As a downward sloping curve

2. As a vertical line

3. As a horizontal supply curve

4. As an upward sloping curve

The correct answer is: As a horizontal supply curve

Cost-plus pricing is a pricing strategy where a fixed percentage or fixed amount of profit is added to the total cost of producing a product to determine its selling price. Graphically, this approach can be represented as a horizontal supply curve. The reasoning behind this representation is that under cost-plus pricing, the price remains constant regardless of the quantity supplied. This means that as the quantity produced increases, the price does not change, which leads to a horizontal line on a graph. The rationale is that producers will supply the product at a price that covers costs plus the desired profit margin, and they will continue to do so without altering the price. A downward sloping curve would suggest that as price decreases, quantity demanded increases, which is characteristic of demand curves, not supply. A vertical line would imply that price is entirely inelastic – quantity supplied does not change with price – which is not indicative of cost-plus pricing behavior. An upward sloping curve suggests that as price increases, quantity supplied also increases, reflecting typical supply behavior, but not in the context of a fixed price strategy like cost-plus pricing. Therefore, the horizontal representation effectively illustrates the nature of cost-plus pricing, where the price established is fixed for the quantity supplied based on costs and desired profit