Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is the cost-plus pricing approach?

1. Setting a price based on the competitor's price

2. Pricing based solely on consumer demand

3. Adding a profit margin to the average cost to set the selling price

4. Setting prices based on production capacity limitations

The correct answer is: Adding a profit margin to the average cost to set the selling price

Cost-plus pricing is a strategy where a business determines the selling price of its products by adding a specific profit margin to the total cost of producing that product. This involves calculating the average cost, which includes direct costs like materials and labor, as well as a portion of overhead costs associated with production. Once the average cost is determined, the business adds a predetermined percentage or fixed amount to establish the final selling price. This method is straightforward and provides a clear, systematic approach to pricing. It ensures that all costs of producing a product are covered, and it guarantees a profit margin. This can be particularly advantageous in industries with stable costs and predictable production processes, where fluctuations in demand are minimal. The other answer choices represent different pricing strategies. Setting prices based on competitor pricing focuses on market trends rather than internal cost structures. Pricing influenced solely by consumer demand does not account for costs, which could lead to losses. Lastly, pricing based on production capacity limitations considers supply constraints but does not inherently include an analysis of costs and profit margins. By using a cost-plus pricing approach, businesses can maintain both cost control and profitability, making it a practical and widely-used pricing strategy.