Analyzing Managerial Decisions: Rich Manufacturing

Analyzing Managerial Decisions: Rich Manufacturing-
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Why do many firms use cost-plus pricing for supply contracts?
The cost-plus pricing relies on simple calculation that takes into account the costs of production as well as the markup to get the target return (Brickley, Zimmerman & Smith, 2009). The final price is dependent on the average cost of the product and the mark up. Firms are guaranteed to have a rate of return, and the contractor/ seller does not run the risk of loss (Accounting tools, n.d.).The new price is now $ 28 from $25 because of a rise in the labor costs.
What potential problems do you envision with cost-plus pricing?
The buyer/purchaser is at a disadvantage if the cost of production rises, but the buyer benefits when the cost of production reduces in a cost-plus pricing (Murphy, 2009). In the case study, both Rich Manufacturing and Bhagat entered into a legally enforceable contract. This places Rich Manufacturing in an awkward position if Bhagat increases the labor costs without providing a justifiable reason.
Should Gina contest the price increase?
Gina should carefully assess the contractual terms, and if there is reason to believe that are no specific details on labor costs, and then it is possible to contest. The contact covers the production costs borne by Bhagat, but the increase in labor costs should not necessarily be shouldered by Rich Manufacturing. The contract did not specify whether the rise in labor costs from wage increase would result to Rich Manufacturing payi...