Disadvantages of Marginal Cost plus Pricing

Disadvantages of Marginal Cost plus Pricing

In marginal cost plus pricing, only the variable cost is focused. There are number of disadvantages or limitation of using marginal cost plus pricing.

1.    Decision Making Needs

Marginal cost plus pricing is widely used for pricing decision. It is important to note that this pricing cannot be used for external reporting purposes i.e. in financial statements.

2.    Fixed Overhead cost is Material

Marginal cost plus pricing cannot be used in organization, where fixed overheads cost are material.

3.    Not Represent Actual Profit

Marginal cost plus pricing system does not reflect the actual profit from the product. Therefore marginal cost plus pricing may produce some misleading projections of profits.

4.    Market Factors are Important

Market factor are important for price determination. In this method demand & supply are not considered for price determination. it means that this pricing strategy ignores some fundamental factors.

5.    Competitor is Alive

Competitor prices in the market are not consider, which another great limitation of marginal cost plus pricing. In real business world prices cannot be decided without considering competitor prices in the market.