Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is the cost-plus pricing approach?

1. A method that sets prices based on competitors' costs

2. A method that adds a profit margin to average cost to set selling price

3. A pricing strategy that cuts prices to gain market share

4. A strategy based on perceived customer value

The correct answer is: A method that adds a profit margin to average cost to set selling price

The cost-plus pricing approach is defined as a method that adds a profit margin to the average cost of a product or service to determine the selling price. This approach involves calculating the total cost of production, including fixed and variable costs, and then adding a predetermined markup percentage to ensure that the business covers its costs and achieves its desired profit level. Using this method allows businesses to simplify pricing decisions by focusing on internal cost structures rather than external market conditions. Typically, this is beneficial in environments where costs are predictable and stable. It is also a straightforward approach that can help businesses maintain consistent profit margins across their product offerings. Other methods of pricing, such as those based on competitors’ costs or market perceptions, emphasize different factors and do not follow the same principle of internal cost calculations that cost-plus pricing hinges upon. In contrast, cutting prices to gain market share focuses on strategy aimed at increasing sales volume, which may not necessarily protect profit margins or cover costs effectively.