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Cost Plus Pricing

  Cost-Plus Pricing

Andrew’s Version

Price Fixation As per Cost Plus Doctrine

     Prof. Andrew too put forward a cost plus doctrine of price fixation by businessmen. Andrew scrutiny is similar to that of Hall and Hitch but there are some variations among the two.

      A significant variation amongst the two falls in the use of the aspect of costing margin by Andrew. The costing margin is conceived by Andrews as a supplementary to invariable average direct cost and will usually likely to cover the costs is the indirect aspects of manufacturing and offer a normal level of net profit.

     Therefore, like the scrutiny of Hall and Hitch addition of costing margin to the average variable cost for fixation of price of the commodity goes against the price fixation on the basis of profit – optimising doctrine of the traditional thesis of value.

      Therefore, the aspect of costing margin of Andrew is likely to the mark-up of Hall and Hick but there is a variation in that whereas Hall and Hitch overlooks a invariable or inflexible mark-up or a margin for expenses cost and normal profit, Andrews discusses at length the circumstances in which there might be some flexibility in the costing margin in response to rivalled and market influences.

      As shall be carried out later the introduction of flexibility in the costing margin brings Andrew cost plus or average cost price thesis closer to the price thesis depends on profit optimisation doctrine.

      Another variation among Andrew and Hall and Hitch’s versions of cost plus pricing thesis is that while the latter use kinked demand curve along with average cost pricing, the former does not make use of the twisted demand curve postulates in his cost plus pricing thesis.

      Still another significant variation among the two is that whereas Hall and Hitch is regarded that average cost changes with productivity and average cost curve is U Shaped. Andrew outlooks, for a huge pertinent range of productivity, average direct cost stays invariable.

Andrew cost plus pricing thesis may be summarised as below:

  1. The rate which will be set by a entrepreneur industry parities the estimated average direct cost of manufacturing plus a costing margin. In other words rate will be parities to the full cost per unit of productivity.
  1. Next to it, Andrew presumes on the basis of experiential investigations that average direct cost i.e. average variable cost stays invariable over a huge range of productivity, given that prices of direct aspects (i.e. variable aspects stays unvaried).
  1. Therefore, as per Andrew average direct cost curve is a horizontal straight line over a good part, if the prices of variable aspects stays invariable.
  1. As said above, the costing margin will cover the cost per unit incurred on the indirect of manufacturing i.e. fixed aspects and on the general rate of profit.
  1.  Once fixed the costing margin will stay invariable whatever the level of productivity. However costing margin will differ as a consequent of the permanent variations in the prices of indirect i.e. fixed aspects of manufacturing.
  1. As mentioned before, Andrew also outlooks variations in the costing margin in response to the rivalled and market forces.
  1. Lastly, Andrew scrutinises also suggests that provided the rates of direct aspects of manufacturing the rate of commodity will stay the same whatever the level of productivity.
  1. Lastly at the rate predetermined on cost plus basis the provided commodity will have a well defined market and the industry will sell the volume of the commodity demanded at that price by the purchasers.
  1. The thesis of cost plus pricing as propounded by Andrew is explained diagrammatically below. Cost Curve AC in this diagram denotes the average direct cost i.e. average variable cost.
  1. It will be seen that average direct cost curve AC is saucer shaped that is it first drops then stays invariable for rather a huge enhancement in productivity and then ultimately hikes.

  1. Relatively, to this MC is marginal cost curve, MC curve drops in the beginning and lies at the start and lies below AC, then it coincides with AC curve and ultimately MC lies above AC.
  1. In order to proceed to fix the price, apart average direct cost a business industry has to compute the total indirect costs and also the volume of profits it wishes to earn.
  1. The aggregate indirect costs plus the volume of profits planned capitulates a fixed sum of money which will stay invariable for fixation of price in the short run.
  1. The costing margin as per to Andrews is procured from this fixed sum of money by dividing it by some chosen productivity.

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