Question

A firm can purchase a separate part from an

outside source @ Rs.11 per unit. There is a

proposal that the spare part be produced in the factory itself. For this purpose a machine costing

Rs.1,00,000 with annual capacity of 20,000 units

and a life of 10 years will be required. A foreman

with a monthly salary of Rs.500 will have to be

engaged. Materials required will be Rs.4.00 per

unit and wages Rs.2.00 per unit. Variable

overheads are 150% of direct labour. The firm can

easily raise funds @ 10% p.a. Advise the firm

Whether the proposal should be accepted.​

Answer 1

Answer:

Explanation:

Thus, in the long run the selling price should cover all costs variable and fixed and bring the desired margin of profit. But under special circumstances, products may have to be sold at a price below total cost, if such a step is necessary to meet the situation arising due to competition, trade depression, additional orders for utilizing spare capacity, exploring new markets, liquidation of excess stock etc.

Thus, in special circumstances, price may be below the total cost and it should be equal to marginal cost plus a certain amount (if possible). This is only a short term step taken with the hope that bettor times will come when prices will be increased. Pricing decisions are thus affected by long term and short term objectives.

Illustration 1. (Determination of Selling Price under both monopoly and competitive conditions):

In a purely competitive market 10,000 units of a product can be manufactured and sold and a certain amount of profit is generated. It is estimated that 2,000 units of that product need to be manufactured and sold in a monopoly market to earn the same amount of profit