How do differences between planned and actual volume impact companies that use a cost-plus pricing strategy?
What will be an ideal response?
Answers will vary.
When a company uses a cost-plus pricing strategy, the product cost is particularly important because selling prices are set by adding a markup to that product cost. The cost per unit consists of two components, a variable cost per unit and a fixed cost per unit. While the variable cost per unit is constant, the fixed cost per unit varies with volume. The greater the volume, the smaller is the fixed cost per unit. Thus, the total cost per unit decreases as additional units are produced. Because actual activity is not known until the end of the accounting period, day-to-day prices must be based on planned activity. Thus, differences between planned and actual activity volumes can have a significant impact on reported profits and on selling prices.
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