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Applications of
Fixation of Selling Price:
• Marginal cost of a product represents the

minimum price for that product and any sale
below the marginal cost would entail a cash
loss.
• The price for the product should be fixed at a
level which not only covers the marginal cost
but also makes a reasonable contribution
towards the common fund to cover fixed
overheads.
• The fixation of such a price for a product
would be easier if its marginal cost and
overall profitability of the concern is known.
Maintaining a Desired Level of Profit:
• Under this technique, the contribution ratio

indicates relative profitability of different
products of business where there is any change
in sales, total fixed cost, selling price etc.
Poll
• A product is sold at a price of ₹ 120 per unit
and its variable cost is ₹ 80 per unit. The fixed
expenses of the business are ₹ 8,000 per year.
Break-even point is
(A) ₹ 24,000
(B) ₹ 120,000
(C) ₹ 116,000
(D) ₹ 28,000
Decisions Involving Alternative Choices:
• CVP analysis helps the management in

making decisions involving alternative
choices. Exploring
New Markets:
Cost Discontinuan
Shut-Down
benefit ce of a
or Continue:
analysis Product Line:
Make or Buy
Decisions:
Determination of Product or Sales
Mix:
• Presuming that fixed costs will remain unaffected,
decision regarding sales/ production mix is taken on
the basis of the contribution per unit of each
product.
• The product which gives the highest contribution
should be given the highest priority and
• the product, the contribution of which is the least,
should be given the least priority.
• A product giving a negative contribution should be
discontinued or given lip, unless there are other
reasons to continue its production.
Discontinuance of a Product Line:
• The factors to be considered:

• The contribution given by the product
• The capacity utilisation,
• The availability of product to replace the
product
• The long-term prospects
• The effect on sale of other products.
Make or Buy Decisions
• The marginal cost of manufacturing is to
be compared with the purchase price of
the relevant material and
• Marginal cost > purchase price= Buy
• Marginal cost < purchase price =
Manufacture
Poll
• Mehtaab Ltd. decided to produce clothes in
their industry. The marginal cost of cloth is 200
and if it purchase it from market and sell it
directly it will cost 500. what decision company
will make –
A. Manufacture the cloth
B. Purchase it
C. Both
D. None of above
Make or Buy Decisions:
• The decisions on whether to manufacture

components in-house or buy them from
outside suppliers are called ‘Make or Buy
Decisions’.
• For example, in India, all automobile
companies are buying different parts or
components from different suppliers – car
battery from Exide, tyre from MRF, fuel
injecting system from MICO, etc.
A detailed analysis of cost and non-cost factors are to be
made.
• Cost Factors:
• i. Cost of materials and its availability at affordable price.
• ii. Availability of labour and cost related to labour.
• iii. Cost of acquisition of new technology, plant, machinery and
equipment.
• iv. Cost of operation.
• v. Cost of transportation.
• vi. Cost of ordering and holding inventory.
• vii. Cost to be paid to suppliers.
• viii. Cost of stock out.
• ix. Cost of construction of production facility.
• x. Lease rent of production facility or machinery and equipment
Non cost factors
• i. Policy of the organization.
• ii. Government’s policy (for example, present US government
discourage outsourcing).
• iii. Trade union’s resistance.
• iv. Reliability of supply.
• v. Availability of suppliers with required technology.
• vi. Secrecy of company production.
• vii. Capability of the supplier to supply required quantity and
quality.
• viii. Effects on workers’ morale.
• ix. Possibility of using idle capacity for other profitable
purposes.
• The factor that is largely considered while
making make or buy decision is –
A. Quality of supplier
B. Reliability of supply
C. Production irrelevancy
D. Both a and b
• the manager can evaluate alternative using
marginal costing system. Based on
marginal costing, comparison is to be
made between cost of buying the product
or service and the marginal cost of
manufacture.
Shut-Down or Continue:
• Sometimes a business is confronted with
the problem of continuing or suspending
the business operations
Tempora • ‘shut-down’
• due to some temporary difficulties
ry viz., depression in the market etc..
• a comparison has to be made
suspensi between the costs andand benefit. In
case the benefits exceed the costs it is
on advisable to shut-down
• ‘closing down’
• comparison should be made
Permanen between the revenues from
continuing operations and
t revenues from complete closing
down and sale of the plant.
Poll
• A decision regarding temporary
closure should be made on
• a. Cost data
b. Economic factors
c. Social factors
d. All of the above

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Applications of

Fixation of Selling Price:

• Marginal cost of a product represents the

• Under this technique, the contribution ratio

• CVP analysis helps the management in

• The factors to be considered:

• The decisions on whether to manufacture

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