Marginal Cost Pricing
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Marginal Cost Pricing
Pricing on marginal cost basis means that the prices should be so set that at least the marginal cost, popularly known as direct costs are covered. Ordinarily the total cost can be divided into two broad categories: fixed cost and variable cost. Up to a certain level of output, fixed costs remain unchanged irrespective of the volume of output. Variable costs on the other hand, vary in proportion to the volume of production. Thus, under the marginal cost pricing system, the relevant cost is the variable cost or the direct cost. The use of marginal cost pricing in the case of export markets is advocated on the basis that if the manufacturers are able to realize the direct cost including those involved in export operations specifically, they would be able to export without in any way affecting the overall profitability of their firms.
There are a number or points in support of the use of marginal cost for export pricing:
1. Export sales are additional sales and, therefore, these need not be burdened with overhead costs which are ordinarily revocered fromt eh domestic markets.
2. The manufacturer’s product is probably less well known in foreign markets than that of his competitors from developed countries.
3. The markets for the products of developing countries are usually in countries with low national income. In such cases, high prices may limit the sales to a small segment of the market. Low prices, on the other hand, may serve to widen and create markets.
4. Competition in foreign markets may require quotation of a lower price.
The question now arises: how to recover the fixed or overhead costs? There are two possibilities-
i. Fixed costs may be recovered from the domestic market, and
ii. Extra loading may be done on commodities that can bear high costs.
i. the existence of a large home market,
ii. adoption of mass production techniques which will reduce the gap between the full and the marginal costs,
iii. the capacity of the home market to pay higher prices.
Again the basic assumption for the use of marginal cost pricing is that additional production for exports is possible without increasing overhead costs.
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There are a number or points in support of the use of marginal cost for export pricing:
1. Export sales are additional sales and, therefore, these need not be burdened with overhead costs which are ordinarily revocered fromt eh domestic markets.
2. The manufacturer’s product is probably less well known in foreign markets than that of his competitors from developed countries.
3. The markets for the products of developing countries are usually in countries with low national income. In such cases, high prices may limit the sales to a small segment of the market. Low prices, on the other hand, may serve to widen and create markets.
4. Competition in foreign markets may require quotation of a lower price.
The question now arises: how to recover the fixed or overhead costs? There are two possibilities-
i. Fixed costs may be recovered from the domestic market, and
ii. Extra loading may be done on commodities that can bear high costs.
Feasibility
The feasibility of the adopting of marginal cost pricing would, however depend upon:i. the existence of a large home market,
ii. adoption of mass production techniques which will reduce the gap between the full and the marginal costs,
iii. the capacity of the home market to pay higher prices.
Again the basic assumption for the use of marginal cost pricing is that additional production for exports is possible without increasing overhead costs.
For more help in Marginal Cost Pricing click the button below to submit your homework assignment