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In periods of recession, a firm may sell its articles at a price less than the total cost but above the marginal cost for a limited period.
The advantages of this practice are:
(i) The firm can continue to produce and use the services of skilled employees who are well trained and will be difficult to re-employ later if discharged.
(ii) Plant and machinery can be prevented from deterioration through idleness.
(iii) The business would be ready to take advantage of improved business conditions later.
(iv) This avoids the competition of securing the business of the firm.
One thing to remember here is that a situation like this should not lead to a drastic price cutting and the orders accepted should not cover a long period extending over the production facilities of a period when business conditions improve.
It may also be justifiable to sell the product at a price below marginal cost for a limited period provided the following conditions prevail:
(i) Where materials are of perishable nature.
(ii) Where stocks have been accumulated in large quantities and the market prices have fallen. This will save the carrying cost of stocks.
(iii) Is it essential to reduce the prices to such an extent in order to popularise a new product?
(iv) Where such reduction enables the firm to boost the sales of other products having larger
profit margin.
(iv) Where such reduction enables the firm to boost the sales of other products having larger
profit margin.
