IAI Actuarial Core Principles · Business Economics · Pricing strategies in the financial services sector
Which of the following is the main weakness of full-cost (cost-plus) pricing for a financial services firm?
The main weakness is that it ignores demand conditions and price elasticity. Prices are built from allocated costs plus a margin, so the firm may set prices customers will not accept or leave profit unearned where demand is strong.
- AIt cannot be applied when costs are known
- BIt ignores demand conditions and price elasticityCorrect
- CIt always produces losses
- DIt requires no estimate of volume
- It prevents any profit margin being included
Explanation
Cost-plus pricing builds prices from costs and a margin, so it pays little attention to how customers respond to price or to rivals' prices. It does need a volume estimate to allocate fixed costs and it does include a margin.
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