Assess the Feasibility of Cost-Plus Pricing for a High-Tech Product
Instruction: Evaluate the application of cost-plus pricing in the context of a high-tech product with rapid innovation cycles.
Context: This question examines the candidate's ability to discern the suitability of cost-plus pricing in a high-tech environment where production costs and market conditions change rapidly.
Updated
Official answer available
Read the opening below, then unlock the full answer and practical guidance.
Cost-plus can provide a cost reference in a rapidly changing technology market, but I would not rely on it as the main decision rule. Component prices, manufacturing yields, support needs and the product's useful selling life can change before development spending is recovered. A competitor's breakthrough can reduce demand without reducing our sunk development cost.
For illustration, suppose a product has $100,000 of fixed development cost and $50 variable cost per unit...