Prices are controlled by market conditions and economic factors

Prices are controlled by market conditions and  economic factors that by decisions of management yet fixation of selling prices is one of the most important functions of management. The function are under normal circumstances, in time of trade competition, in time of trade depression, in accepting additional orders for utilizing idle capacity, In exporting and exploring new markets.

In normal circumstances the price fixed must cover total cost as otherwise profits cannot be earned. It can be fixed on the basis of marginal cost by adding a high margin to marginal cost which may be sufficient to contribute towards fixed expenses and profits. But under other 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 etc. thus, in special circumstances, price may be below the total cost and it should be equal to marginal cost plus a certain amount. Pricing falls during depression and the product may be sold below the total cost. In case there is a serious but temporary fall in the demand on account of depression leading to the need for a drastic reduction in prices temporarily, the minimum selling price should be equal to the marginal cost or more than marginal cost the product should be continued. Fixed expenses will be incurred even if the product is discontinued during depression for a short period. If the product can be sold at a price which is a little more than marginal cost, loss on account of fixed expenses will reduce because price will recover fixed expenses to some extent. If the selling price is below marginal cost, loss will be more than the fixed costs because variable expenses will not be recovered fully. Hence, efforts should be made to sell the product at a price which is equal to the marginal cost or more than the marginal cost. Production should be discontinued if the price obtained is below the marginal cost so that loss may not be more than the fixed costs.

When additional orders are accepted or additional markets explore at a price below normal price to utilize idle capacity, it should be very carefully seen that they will not affect normal market and goodwill of the company. The order from local merchant should not be accepted at a price below normal price because it will affect relationship of the concern with the other customer purchasing the goods at normal price. In case of foreign markets, goods may be sold at a price below normal price keeping in view the direct and indirect benefits of exporting such as import quotas, subsidies of Government, prestige of exporting etc. The main factors to be considered before launching a product in the new market, whether the firm has surplus capacity to meet new demand. What price is being offered by the new market ? In any case, it should be higher than the variable cost of the product plus any additional expenditure to be incurred to meet the specific requirements of the new market