Question

If a company (using cost-plus pricing) chooses a predetermined overhead rate that is too high, how will this affect their prices, customer relations and company profitability?

Answer 1

If predetermined overhead rate is too high:

Effect on Prices:

Applied overhead will be high.This will increase cost of goods sold

Consequently, the Prices will be high

Effect on Customer Relations:

Customers will compare the prices with that of other suppliers . Customers will find prices are too high. They are likely to shift to other suppliers . It will have worse effect on customer relations

Effect on Company Profitability:

Initially because of higher prices, profit may be higher . But , with decreasing demand profitability will go down