The current selling price for the Pluto, a mid-sized car, is $19,000. For next year it is anticipated that Pluto will have a $12,000 cost base. What is its prospective selling price, using cost-plus pricing, if the company desires a markup component of 15 percent?
A) $10,200
B) $13,800
C) $19,000
D) $30,000
E) $31,000
The correct answer and explanation is :
The correct answer is B) $13,800.
Explanation:
Cost-plus pricing is a method where the selling price is determined by adding a markup to the cost of the product. The formula for cost-plus pricing is:
[
\text{Selling Price} = \text{Cost Base} + (\text{Markup Percentage} \times \text{Cost Base})
]
Where:
- Cost Base is the cost of producing or acquiring the product.
- Markup Percentage is the percentage by which the company wants to increase the cost to generate profit.
In this case:
- The Cost Base for the Pluto car next year is given as $12,000.
- The Markup Percentage is 15%, or 0.15 in decimal form.
We can calculate the prospective selling price as follows:
[
\text{Selling Price} = 12,000 + (0.15 \times 12,000)
]
[
\text{Selling Price} = 12,000 + 1,800
]
[
\text{Selling Price} = 13,800
]
Thus, the prospective selling price of the Pluto car using cost-plus pricing with a 15% markup is $13,800.
Why This Approach?
Cost-plus pricing is a common pricing strategy used by businesses to ensure they cover the costs of production and make a desired profit margin. In this case, by adding 15% to the anticipated cost base of $12,000, the company ensures that it generates a profit that aligns with its targeted markup percentage.
This method is simple and straightforward, making it an attractive choice for many companies, especially when the cost base is predictable and stable.
Here is a visual representation of the cost-plus pricing calculation for the Pluto car. The chart illustrates the breakdown of the cost base, markup, and selling price.
- The Cost Base is $12,000.
- The Markup added is 15% of the cost base, which amounts to $1,800.
- The Selling Price after adding the markup is $13,800.
This is how the cost-plus pricing method works in determining the final selling price.