In the first quarter of the year 2015/2016, City Steel’s total revenues decreased by 35 per cent compared with the previous year. Adverse economic conditions caused the Group’s products to decrease substantially and made price competition become more intense. A drop in steel price of more than 30 per cent from the previous year had contributed to a decrease in the Group’s total revenues. Since the Group employed cost-plus pricing strategy to determine products selling prices, once material costs decreased, the Group’s sales revenues would decline, which caused the Group’s net profits to decrease correspondingly. The Group had to reduce some mark-ups on the selling price in order to maintain sales revenues and retain customers. Also, the Group incurred some fixed expenses that did not vary according to a decrease in revenues.
Questions:
1 To what extent did cost-plus pricing contribute to the decline in total sales revenues?
2 How might City Steel determine the price at which it sells steel?