PPT on Fixation of selling price cost analysis and decision making.

1. Fixation of Selling Price - Cost Analysis and
Decision Making:

2. Fixation of selling price is one of the significant tasks of management. Prices are
usually ascertained by market conditions and other economic aspects. Cost volume
profit analysis supports the management in fixing the selling prices under diverse
conditions.

3. Pricing under Regular Circumstances
Under regular conditions, the prices are based upon aggregate cost of sales so as to
cover both permanent as well as variable cost and in totaling to offer for specific required
margin of profit. However, prices can be predetermined on the basis of marginal cost by
totaling an adequately high margin to marginal cost so as to wrap the predetermined cost
and profits.
Nevertheless, under other situations, articles may have to be sold at a price below the
aggregate cost. In such conditions, the prices must be predetermined on the basis of
marginal cost in such an approach so as to coat the marginal cost and put in something
in the direction of fixed expenses.

4. Selling Price lower than the Marginal Cost :
From time to time it may become significant to decrease the selling prices to the height
of marginal cost or even lower than the marginal cost. In the subsequent conditions the
selling price may be fixed even lower than the marginal cost.
1. To bring in a new manufactured goods in the market
2. To widen foreign markets
3. To eradicate the contestant from the market
4. To evade the reduction of expenditure of workforce

5. 5. To ward-off perishable articles
6. To evade additional losses by shutting down the business
7. To ward off in-excess inventories
8. To utilize inactive capacity
Let us discuss an illustration to understand this concept better.

6. Illustration
The marginal cost of an article is $ 7.50 and fixed expenses values to $ 112,500. Selling
price per unit is $ 8.50 and 20,000 units can be sold at this rate. Decide whether the
company must sell the article or not.

7. Solution
Total marginal cost = 20,000 units @ $ 7.50 per unit = $ 150,000
Fixed Cost = $ 112,500
Total Cost = $ 262,500
Total Cost Per Unit = $ 262,500 / 20,000 units = $ 13.125

8. Although the selling price of $ 8.50 is less than the aggregate cost, yet it is meritorious to
sell the article at the selling price of $ 8.50 which is higher than the marginal cost of $
7.50. This will decrease the loss due to fixed expenses (in case the article is terminated)
by $ 20,000 as presented below.
Sales = $ 20,000 units @ $ 8.50 per unit = $ 170,000
Loss = Total Cost – Sales = $ 262,500 - $ 170,000 = $ 92,500
Loss if the article is terminated (i.e. fixed expenses) = $ 112,500
Therefore, loss of $20,000 (i.e. $ 112,500 - $ 92,500) will be decreased if article is sold at $
8.50 per unit.

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