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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.
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.
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.
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
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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