Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What term describes the practice of setting a high price to recover production costs?

1. Premium pricing

2. Cost-based pricing

3. Predatory pricing

4. Surge pricing

The correct answer is: Cost-based pricing

The practice of setting a high price to recover production costs is best described as cost-based pricing. This pricing strategy involves calculating the total costs associated with producing a product and then adding a markup to ensure that the company can cover those costs and earn a profit. In cost-based pricing, the focus is primarily on the production costs involved, including materials, labor, and overhead, rather than on consumer demand or competitive pricing. By aligning the price directly with production costs, businesses can ensure that they are at least covering their expenses. This method is particularly useful in industries where production costs are significant and need to be recouped effectively. Other pricing strategies mentioned can lead to different outcomes. Premium pricing, for example, involves setting a higher price to create a perception of superior quality and exclusivity. Predatory pricing involves setting low prices to eliminate competition. Surge pricing refers to dynamically adjusting prices based on demand fluctuations in real-time. Each method serves distinct strategic purposes, but cost-based pricing specifically focuses on the recovery of production costs which solidifies its definition in this context.