Business Degree Certification Practice Test

What type of pricing strategy is illustrated by Dreamland selling pillows at a mark-up above total production costs?

1. Competitive pricing

2. Penetration pricing

3. Cost-plus pricing

4. Value-based pricing

The correct answer is: Cost-plus pricing

Cost-plus pricing is a strategy where a company determines the selling price of a product by adding a specific markup to its total production costs. In the case of Dreamland selling pillows, the company calculates its total costs for producing the pillows and then adds a predetermined percentage or amount as a profit margin to arrive at the final price. This method ensures that all production costs are covered and provides a consistent profit per unit sold. This approach is quite straightforward and helps businesses maintain profitability while ensuring that all incurred costs are accounted for in the price structure. It's important to note that while other strategies focus on market conditions or perceived value, cost-plus pricing is primarily cost-centric, making it distinct from competitive pricing, penetration pricing, and value-based pricing.