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Advantages and Disadvantages of Lowering A Selling Price

Factors to consider before introducing a new shift system include availability of extra workers, ability to train new workers, costs of additional transport and administration, equipment maintenance needs, and whether quality can be maintained. Lowering a selling price could increase the margin of safety but also lowers profits if sales don't increase enough to cover fixed costs. Absorbing overheads using direct labor hours is appropriate if labor is intensive and different grades are used between departments.

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75 views4 pages

Advantages and Disadvantages of Lowering A Selling Price

Factors to consider before introducing a new shift system include availability of extra workers, ability to train new workers, costs of additional transport and administration, equipment maintenance needs, and whether quality can be maintained. Lowering a selling price could increase the margin of safety but also lowers profits if sales don't increase enough to cover fixed costs. Absorbing overheads using direct labor hours is appropriate if labor is intensive and different grades are used between departments.

Uploaded by

Tasnuva Tabassum
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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Advantages and disadvantages of lowering a selling price

Margin Of Safety Margin of safety is the distance between break-even point and expected level of activity. It shows the amount by which actual activity can fall short of expected activity before a loss is incurred. It is a measure of risk. Margin of Safety = Units sold Break even point

Factors that should be taken into consideration before introducing a new shift system:
1 Are extra workers available? 2 Can new workers be trained? 3 Is it worth training workers for what might be a one-off situation? 4 There may be additional costs of transport and administration to be considered. 5 Additional maintenance of equipment? 6 Can quality be maintained?

Implications on the local community if an entrepreneur decides to extend its product range: Additional employment available Increased pollution Work for local suppliers Training for new employees Other suitable answers Why are overheads absorbed using direct labour hours? Overheads tend to be related to time. The company may be labour intensive Using a departmental labour rate is appropriate if different grades of labour are used in each department.

Methods of absorbing overheads: Single factory rate Machine hour rate Unit cost % prime cost % direct labour cost % direct material cost Activity based costing COSTING assumptions which may be made when using break-even analysis and state

one limitation of each assumption.

Assumptions that are made during preparing break even charts

Types of fixed costs:


Depreciation Admin costs Rent Insurance Advertising/marketing Rates Indirect wages Loan interest

STEPPED COSTS: Stepped costs occur when a business increases capacity. As a result of expansion overheads such as insurance, rent and rates and bank interest payments are likely to increase. On a break even chart these increases would result in a horizontal fixed cost line moving to a higher level beyond the output at which increased capacity occurs. Increasing production will allow the firm to potentially earn more profit. However, it couldpose significant risks to the business. Evaluation of the above statement: If budgeted data is reasonably accurate and the budgeted level of activity could be maintained in future years then the business would generate more profits by increasing capacity. Usually, the margin of safety tends to be higher in unit terms but lower in percentage terms The business may make no profit following expansion if sales return to the previous level as he new break-even is the same as the previous sales / output. The capital costs due to the expansion of the business are likely to result in interest payments which would have to be met irrespective of profit performance. Reconciliation Statement for reconciling marginal costing and absorption costing Profit per marginal costing Add-fixed costs in closing inventory Less- inventory as per marginal costing Add-inventory as per absorption costing Less-fixed cost in opening inventory Add-inventory as per marginal costing Less-inventory as per absorption costing Profit as per absorption costing

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