15-13 - cost-plus pricing based on full costs gives...

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13. Four reasons often cited for the widespread use of absorption cost as the cost base in cost-plus pricing formulas are as follows: (1) In the long run, the price must cover all costs and a normal profit margin. (2) Absorption-cost and total-cost pricing formulas provide a justifiable price that tends to be perceived as equitable by all parties. (3) When a company’s competitors have similar operations and cost structures,
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Unformatted text preview: cost-plus pricing based on full costs gives management an idea of how competitors may set prices. (4) Absorption-cost information is provided by a firm’s cost-accounting system, because it is required for external financial reporting under generally accepted accounting principles. Since absorption-cost information already exists, it is cost-effective to use for pricing....
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This document was uploaded on 02/01/2011.

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