Association of Chartered Certified Accountants (ACCA) Certification Practice Test

In the context of pricing strategies, cost-plus pricing is primarily concerned with what?

1. Market competition

2. Cost recovery and profit

3. Consumer demand

4. Equilibrium pricing

The correct answer is: Cost recovery and profit

Cost-plus pricing revolves around the concept of determining the price of a product or service based on the costs incurred to produce it, plus a markup for profit. This pricing strategy involves calculating the total cost associated with the production or provision of goods or services—taking into account direct costs like materials and labor, as well as indirect costs like overhead. Once these total costs are established, a profit margin is then added to arrive at the final selling price. This method is particularly straightforward for businesses as it ensures that all costs are covered while simultaneously generating a predetermined profit. It is often used in environments where costs are relatively stable and predictable, allowing businesses to set prices with confidence that they will recover their costs and earn profit. In contrast, while factors like market competition, consumer demand, and equilibrium pricing are all significant in the context of pricing strategies, they do not directly apply to the core principle of cost-plus pricing. Market competition might influence how much markup a company feels it can add, consumer demand might impact sales volume, and equilibrium pricing could be relevant in dynamically adjusting prices based on supply and demand, but these factors are secondary to the fundamental premise of cost-plus pricing, which is primarily about recovery of costs and ensuring profitability.