FairHome Ltd (FHL) makes a range of ovens for sale to households and small restaurants. The company uses a cost-plus approach to pricing. Direct costs of producing an oven are given in the matrix below

Details TZS

Direct materials 10,900

Direct labour 7,000

Other direct costs 12,100

Total Direct costs (variable costs) 30,000

Indirect costs (Fixed production overheads) 150,000,000

The company absorbs production overheads on the basis of machine hours used. The total required machine hours are 25000 for the year. The production of each oven requires 2 machine hours. FHL requires a profit of 60% on total cost.

Required:

a)Determine the selling price of each oven using the cost plus approach

b)The selling price which is arrived at in a) above is simply a starting-off point in a long process of determining an appropriate price. With relevant examples, discuss this statement.

c)Discuss at least five problems associated with cost-plus pricing approach and at least four advantages of cost-plus pricing.