Final answer:
A company using a predetermined markup on the base cost to set the selling price is employing cost-plus pricing. By combining the production cost with a markup for desired profit, the firm determines its selling price for products such as pizzas.
Step-by-step explanation:
When a predetermined markup is applied to a base to determine the target selling price, the company is using cost-plus pricing. This method entails adding a markup to the base cost of a product to ensure a desired profit margin is achieved. In this approach, the business calculates the cost of production, which includes expenses such as raw materials, labor, and overheads, and then applies a markup percentage to cover the desired profit margin.
In the case provided, a pizza company would calculate the cost of producing a pizza, including ingredients like dough, sauce, cheese, and pepperoni, as well as the depreciation of the pizza oven, rent for the shop, and workers' wages. To this production cost, the firm adds its desired profit, which is informed by the standard profit margins in the pizza business or the restaurant industry at large. The final sum gives the selling price that the firm sets for its pizzas.