Rich Manufacturing Case Study
The cost-plus pricing strategy uses the expenses associated with producing a product and
adding an additional amount, called a markup, to generate a profit. Rich Manufacturing’s
production manager Gina Picaretto purchases 100,000 machine unit parts from Ghagat
Incorporated each year. Ghagat uses cost-plus pricing in their contract with Rich Manufacturing.
Ghagat’s costs per part include $10 for labor, $10 for other costs, and a markup of $5. The
contract between Rich Manufacturing and Ghagat states that a minimum of 50,000 units must be
purchased, however up to 100,000 parts can be purchased at this price. Due to contract
negotiations between Bhagat and the union, Bhagat announced an increase …show more content…
Cost-plus pricing also ensures a positive rate of return because the full
production amount plus markup means full recovery of production costs. Due to the costs
remaining constant it is easy for a company using the cost-plus strategy to estimate revenue for a
particular period time. With these benefits of using cost-plus pricing also comes with some
disadvantages. According to Vivian Guo, “the guarantee of a target rate of return creates little
incentive for cutting cost or for increasing profitability through price differentiation” (Guo,
2012). However, the largest problems with using this strategy are that cost-plus pricing does not
take into consideration the price elasticity of demand for the product, competitors’ pricing, or the
value of the product being provided. These are all important factors to pricing that are lost when cost-plus pricing is used.
As Rich Manufacturing production manager, it is Picaretto’s obligation to
evaluate the announcement that Bhagat will be increasing prices. When cost-plus pricing
The cost-plus pricing strategy uses the expenses associated with producing a product and
adding an additional amount, called a markup, to generate a profit. Rich Manufacturing’s
production manager Gina Picaretto purchases 100,000 machine unit parts from Ghagat
Incorporated each year. Ghagat uses cost-plus pricing in their contract with Rich Manufacturing.
Ghagat’s costs per part include $10 for labor, $10 for other costs, and a markup of $5. The
contract between Rich Manufacturing and Ghagat states that a minimum of 50,000 units must be
purchased, however up to 100,000 parts can be purchased at this price. Due to contract
negotiations between Bhagat and the union, Bhagat announced an increase …show more content…
Cost-plus pricing also ensures a positive rate of return because the full
production amount plus markup means full recovery of production costs. Due to the costs
remaining constant it is easy for a company using the cost-plus strategy to estimate revenue for a
particular period time. With these benefits of using cost-plus pricing also comes with some
disadvantages. According to Vivian Guo, “the guarantee of a target rate of return creates little
incentive for cutting cost or for increasing profitability through price differentiation” (Guo,
2012). However, the largest problems with using this strategy are that cost-plus pricing does not
take into consideration the price elasticity of demand for the product, competitors’ pricing, or the
value of the product being provided. These are all important factors to pricing that are lost when cost-plus pricing is used.
As Rich Manufacturing production manager, it is Picaretto’s obligation to
evaluate the announcement that Bhagat will be increasing prices. When cost-plus pricing