Suppose a local golf club uses a cost-plus approach to charge members to play go

Question

Suppose a local golf club uses a cost-plus approach to charge members to play golf. In particular, the club estimates that it will cost $273,000 to provide 16,000 rounds of golf. If the club marks up the average cost of producing a a round of golf 30 percent, then it will charge a price of $_____ per round of golf. (Enter a numeric response using a real number rounded to two decimal places).

Evaluate whether cost-plus pricing maximizes profits.

A. Cost-plus pricing comes close to maximizing profits when marginal cost and average cost are roughly equal.

B. Cost-plus pricing comes close to maximizing profits when marginal cost is difficult to calculate.

C. Cost-plus pricing does not maximize profits because it does not necessarily result in a quantity where marginal revenue equals marginal cost.

D. Cost-plus pricing fails to maximize profits because it focuses only on average total cost and ignores marginal cost.

E. All of the above.

Explanation / Answer

1> Average cost per round is $273000/16000=$17.0625

So, the price per wound will be $17.0625(1+0.3)=$22.18

2> D. ?Cost-plus pricing fails to maximize profits because it focuses only on average total cost and ignores marginal cost.

Reason

To maximize profit, one should only think about the marginal cost and ignore the average cost.

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