1. Why do many firms use cost-plus pricing for supply contracts? Firms use cost-plus or markup pricing because firms have informal understanding or implicit contracts with their long term customers that permit them to raise the prices when costs increases. Firms must price their products in by which they are able to at least cover their operating cost. Thus it is easily possible with cost plus-pricing. 2. What potential problems do you envision with cost-plus pricing? The main problem with cost plus pricing is that the buyers might not be loyal at all times.
They can look forward for some other manufacturers when prices of one manufacturer rise. This in turn can affect the sales of the firm during period of high costs. 3. Should Gina contest the price increase? Explain? Gina should not contest for the price increase because she has signed the contract with Bhagat that she will pay for the cost plus $5. Also that as the labor is unionized, pulling more to the labor for not increasing the wages can lead to strikes and thus production halts. 4. Is the increase more likely to be justified in the short run or the long run? Explain.
The increase is likely to be justified in the long run as we are assuming that in the long run, prices of the products increases due to inflation and other factors. Therefore in the long run this price increase may be justified but in the short run if other manufacturers are offering the same products at a lower price, then they can switch to other suppliers. 5. How will a $3 increase in the price of machine parts affect Gina’s own production decisions? Gina has to buy 50,000 machine parts any how from Bhagat Incorporated as it is specified in their contract to buy minimum of 50,000 machine parts.
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Then Gina will have to conduct market analysis whether the consumers are willing to buying from Rich Manufacturing Company with increased price or not. If not then Gina will have to look forward for some other supplier as well so as to get the machine parts at reduced cost other wise Rich Manufacturing Company’s sales volume and the profits will go down.
Seller pricing strategies: A buyers perspective, David V. Lamm, Lawrence C. Vose, http://www. dau. mil/registrar/_private/Seller%20Pricing%20document. doc
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