Rich manufacturing

The cost-plus pricing is a strategy that allows firms to ensure there is a margin of the products after considering all cost involved in distribution process.  Estimation of the production cost is quite important for the firm which makes it possible for the firm to set prices that will yield the desired rate of return. For the supply contracts, the strategy is quite easy it terms of calculations where the desired profits is simply added to the production cost to obtain the price.  The strategy is preferred for the supply contracts since a full coverage of cost is provided so that a rate of return that is consistent is maintained amidst uncertainty on the future production cost. There is allows a markup that always ensure there is a rate of return that is positive (Burton & Holden, 2013).  This is because a justification can easily be shown of the price increment by the increase in cost.

The cost plus strategy encounters various problems that make it quite inefficient at times. To begin with, the rate of return targeted has little incentive for cost reduction or for improving level of profitability using price differentiation. The management o the firm can easily be passive toads pricing decisions and in turn laziness is facilitated so that there is failure to take advantage of changing profits levels as the consumer and the market changes. The adoption of this strategy acts as an incentive for cost maximization and a lot of potential profits are wasted (Burton & Holden, 2013).  The pricing strategy does not consider competing product prices. In case the substitute product sells at lower prices, the cost plus strategy may not be the best in enhancing competitiveness of the firm’s products in the market. The strategy also ignores the buyer or consumer in terms of what the product is worthy to them.  The buyer may be ready and willing to pay a higher price for the same products. The pricing method is not appropriate in terms of being responsive to various changes that happen in market and this may be a hindrance to long-term success (Burton & Holden, 2013).

Gina should argue against the increase in price if it becomes clear that Bhagat Inc is not reducing costs and does not attempt to balance the high cost of labor through adjustment of various inputs present.  The major reason for contesting is the contacted signed with the supply which is binding and should not be contested. As long as her firm is honoring the terms of the contract as stipulated, an arbitrary increase in the price of the product should be contested.

The increase in the price of spare machine parts by the supplier may be justified in the long-run. This is because the supply entered into an agreement with the labor union on wage increment well aware of the contract it had with Rich Manufacturing Company. The increment on the prices may not also be considered in the short-run but may take time to be incorporated into the general cost.

An increase in price of machine parts by $3 will have a direct impact in the production cost of the Gina’s company. This means that she will have to make production decisions that will ensure the additional cost is captured in the overall cost of final products. If the additional cost will have a significant effect on the firm’s profitability, prices will have to be adjusted.

References

Burton, M., & Holden, R. (2013). Pricing with confidence: 10 ways to stop leaving money on the table. Hoboken, N.J: Wiley.