Introduction
After careful analysis of possible production levels for the sound card at which the firm will make maximum profits is 240,000 units. At this level the marginal cost of production is at minimal and the profits made will be at the highest. Before this production level marginal cost of product continues to diminish until this level which is optimal then it begins to increase. The assumption that has been made for the analysis includes:
- Change the levels of revenues and costs arise only because of changes in the number of units produced and sold.
- fixed costs and variable costs are easily identifiable.
- Selling price, variable cost per unit, and fixed costs are known and constant.
- All revenues and costs can be added and compared without taking into account the time value of money.
Main Text
This costs that is the variable cost and fixed cost play an important role in determining the pricing strategy of the company. We will produce goods and sell at just a price above average cost when the firm is producing and selling more than break even point and while the aim is to acquire new market and to beat the competitors. this in essence is meant to attract new customers as well as make the company remain competitive. Variable costs vary with changes in volume produced. variable cost can be avoided if one unit is not produced. Fixed cost on the other hand is another course which considered in determining the price levels but it is important when the production is in small quantities. Therefore, in determining the prices of production by this company the specific costs incurred such as direct material direct overhead production variable overhead production fixed cost and variable administration cots will be considered in setting a price. Fixed cost of administration will not be taken into account when using marginal costing. The objective of variable costs is to ensure that the firm is able to remain in business if they already they are break even point. In using marginal cost as a basis for tendering for fixing selling prices the selling must be borne in mind.
Economic selling prices cannot in the long run be set without regard for fixed expenses. Although in certain circumstances orders may be accepted at less than their total cost, such a course result in a general reduction of selling prices due to intensified competition. The manufacturer may need to expand sales and activity generally in order to maintain his previous levels of overall profit. Management must recognize that a new product which represents a small proportion of total sales at the moment, and which they may be prepared to sell at a figure below total costs substantial proportion of the total sales. In due course products which are currently bearing their full share of fixed overhead will be their share of fixed overhead, management may be to increase prices and sales volume to maintain profits. Such action could well prove disastrous.
In reality, no costs is fixed in the long run, as demand artificially stimulated may result in an increase in fixed charges, e.g. owing to the necessity of increasing the size of the factory.
The company will consider closing down operations when it is making losses in the long run. At level the firm is operating at price that is below the average costs of production. However if the issue is in the short run then the firm will not exit the market. In short run a firm has to satisfy the two following conditions:
- Marginal revenue must be equal to marginal cost.
- The marginal cost curve should intersect the marginal revenue curve from below.
Hence the competitive equilibrium price in the short run equals its marginal revenue. In short run there are two parts of total cost. One is the fixed cost which is independent of the level of production. Other is the variable cost, which is directly related to output produced. In the short run if AVC<MC
The management should ensure that improves marketing strategies to ensure that we retain the current market. If selling becomes competitive then we will try to reduce expenses or increase the price of the unit. The price adjustment is more sensitive as compared to changes units sold. However market forces always determine price and it may be beyond the stores control.
Conclusion
This analysis will assist us to predict the cost levels and behaviors of a certain sales activity level for the division. This is so when the past conditions and the future expected changes are taken into consideration while predicting the cost to be used.
References
Alfred. W. and Hague, D. C. (1980), A Textbook of Economic Theory. Published By- ELBS, Chapter -5