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How can a product line or operation be loss making if its using cost plus pricing? Clearly there are other factors to be considered would you apply the Porters 5 forces model to answer this question?
I have disregarded the diamond as the chain is not near a cluster of companies which operate within the same industry.
Its the BPP Course Exam – I am looking for a steer in the right direction please:)
There are various non financial factors regarding the area and population of the shops, including the economy and the competitors.
I have a production cost and operating cost per product and mark up of 33.3%, however no sales volumes or total overhead costs. I have to explain why some shops are loss making despite using cost plus with calculations.
I think I am seriously over thinking the answer by trying to apply models!
Thank you for your time.
I appreciate this is not a BPP site, as I said in my earlier post I was not looking for you to give me an answer but a steer in the right direction. I do value this site as a resource!
Thank you for your time.
Well, as I said, it’s difficult to give advice without seeing the question. However the following might help:
Cost plus pricing is completely inward looking. You might want to add 25% to your costs, so if a unit cost $80 to make you would price it at $100. However, there is no guarantee that your product will sell at that price. You might have extinguished all demand or there might be competitors selling at a lower price than you. I’m not sure a model is needed, though you could just mention potential rivalry and buyers switching to a lower priced supplier
As for the diamond, I assume you are trying top apply Porters’ Diamond for country/ competitiveness. I don’t think that, in general it is safe to disregard a model just because one element is missing. In particular cluster of supporting industries are likely to grow up in the wake of the main industry. Depending on the question, you might still be able to talk about the other factors. Remember, this model is to explain how some countries excel in certain industries; it is not used to describe how companies excel within an industry.
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