ACCA Performance Management (F5) Certification Practice Exam

What is a significant disadvantage of cost-plus pricing?

1. Establishing an optimum price is prioritized

2. Does not consider the price-demand relationship

3. Encourages price stability

4. Delegation of pricing decisions

The correct answer is: Does not consider the price-demand relationship

Cost-plus pricing involves setting a product's price by adding a specific markup percentage to the cost of producing it. While this method simplifies pricing by ensuring that all costs are covered and a profit margin is included, it has notable limitations, particularly regarding the relationship between price and demand. One significant disadvantage of cost-plus pricing is that it does not take into account the price-demand relationship. This means that it ignores how consumers respond to price changes and whether they are willing to pay the price set. As a result, businesses may either overprice their products, leading to reduced sales, or underprice them, resulting in missed profit opportunities. This disregard for market demand can ultimately hinder the company's ability to compete effectively in the marketplace because the price set may not align with what customers are willing to pay or how competitors are pricing similar products. The other aspects of cost-plus pricing do not inherently provide the same challenges as neglecting demand. While establishing an optimum price may be important, cost-plus pricing does not prioritize this due to its formulaic nature. Price stability can result from this method, but it may not be conducive to adapting to market changes. Finally, though delegation of pricing decisions can introduce flexibility, it does not directly contribute to the drawbacks of cost-plus pricing itself