Which of the following statements about prices is false? Select one: a. A variable cost-plus pricing...

Which of the following statements about prices is false?

Select one: a. A variable cost-plus pricing formula requires a higher mark-up percentage than a total cost-plus pricing formula. b. Prices must cover all costs and a normal profit margin. c. If prices are set close to variable manufacturing costs, the firm will generally earn a higher profit margin. d. Different definitions of cost base, each combined with a different mark-up percentage, will result in the same price for a product or service. Clear my choice

Expert Solution

Statement 'C' : "If prices are set close to variable manufacturing costs, the firm will generally earn a higher profit margin" is FALSE. This is because, if sales price is close to variable manufacturing costs, seller will only be able to recover a part of total cost i.e. variable manufacturing cost. It wont recover its other variable costs and fixed costs. Nor it will provide any margin. Hence, seller will incurr losses.

Statement A is true as markup on total cost is a greater value than a markup on variable cost if markup % is same. This is because Total Cost > Variable Cost. Hence x% on Total cost > x% on variable cost. So, A variable cost-plus pricing formula requires a higher mark-up percentage than a total cost-plus pricing formula.

Statement B is true because in order to earn profits, sales price must cover all costs (variable + fixed) and also provide some markup or margin. Hence, Prices must cover all costs and a normal profit margin.

Statement D is true because different definitions of cost base, each combined with a different mark-up percentage, can result in the same price for a product or service. Example VC + Markup x% may equal TC + markup y%.

ekkarill92 answered 2 years ago

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