Question

If a company uses a cost-plus approach to pricing, it will find:__________
a) there are several different definitions of cost and the higher the cost, the higher the markup percentage.
b) there are several different definitions of cost and the higher the cost, the lower the markup percentage.
c) there is one definition of cost, and there is no relationship between cost and the markup percentage used.
d) there is one definition of cost, and there is no markup percentage with the cost-plus approach.
e) it is in violation of generally accepted accounting principles (GAAP).

Answer 1

Answer: b) there are several different definitions of cost and the higher the cost, the lower the markup percentage.

Explanation:

Cost-plus pricing means that the company ascribes a price to a product based on the cost to make it. They will add a markup on this cost which would be a percentage of the cost.

They will find that there are several definitions of cost which means that some items will be charged as cost to the product and others will not be such as advertising cost.

Also, the higher the cost, the lower the markup percentage for the simple reason that the percentage is based on the cost so it increasing means any percentage added onto it represents a smaller amount of itself.