ABSTRACT
A preference of managers, especially those in the small firm sector, is to use what appears to be the logical and most easily applied concept in reaching a decision. Unfortunately, on occasion this perspective can sometimes cause the firm to make a significant error. One such example is provided by the concept of cost plus pricing. This is based upon the formula that price = cost/unit + desired/profit. Although the formula is intuitively appealing, it will be purely fortuitous for the resultant price to be acceptable to the firm’s customers. This is because customers, not firms, determine price. In the case of cost plus pricing the supplier is attempting to mandate the price to the market. As a consequence there is a reasonable probability that the calculated price will be perceived by customers as being either too high or too low (Shapiro 1973).
