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- Download: http://writingsdepot.com/downloads/rich-manufacturing/
- *Production costs change frequently due to changes in the price of labor, machines, fuel, etc.
- Cost-plus contracts shift the responsibility and risk of the price changes to the purchaser of the product.
- * They can reduce the incentives of the supplier to be efficient and to seek cost reductions. The supplier is paid a mark-up regardless of cost.
- * Presumably Bhagat will be able to avoid part of the increase in labor costs by changing the input mix (reducing labor and increasing capital). Consider the standard isocost line analysis.
- * The flexibility to change the input mix is likely to be less in the short run than the long run. Thus, the price increase might be more justified in the short run.
- The input mix is flexible to change which could make it less in the short run than the long run.
- Applying this method the price increase would be justified for short term.
- * Presumably Gina’s optimal input mix will change as well since she is paying more for machine parts.
- 1. Why do many firms use cost-plus pricing for supply contracts?
- 2. What potential problems do you envision with cost-plus pricing?
- 3. Should Gina contest the price increase? Explain.
- 4. Is the increase more likely to be justified in the short run or the long run? Explain According to our text.
- 5. How will a $3 increase in the price of machine parts affect Gina’s own production decisions?
- Download: http://writingsdepot.com/downloads/rich-manufacturing/
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