Can we sell below total cost

Can we sell below total cost

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  Financial Management TOPIC Jl IKPNBintaro No 1, Pesanggrahan, Tanah Kusir, Jakarta, Special Capital Region of Jakarta 12330, Indonesia CAN WE SELL BELOW TOTAL COST?
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  i . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Can We Sell Below Total Cost? The obvious answer to a question of selling below cost is dependent on whether the person responding to the question understands the nature of fixed and variable costs. In general, the answer would be, “Not unless you plan to go broke.” However, before the question can be answered intelligently, we should first answer which cost. The best answer would be: “If variable costs are cov- ered and a contribution toward fixed costs is made, selling below total cost can be considered.” Consider a catering company that rents its facilities for $80,000 per year and has additional annual fixed costs for management salaries, insurance, deprecia- tion charges on furnishings and equipment, and other fixed costs of $66,000. The total fixed costs would be $146,000, or an average of $400 per day: Fixed costs / 365 days = $146,000 / 365 _= $400 The catering company and its facilities can handle only one function per day, and operates with a variable cost of 60 percent of total sales revenue. The company was approached by an organization wanting to sponsor a lunch for 60 people next week but can only pay $10.00 per person. Normally, this catering company would not consider handling a group luncheon this small; however, on this occasion the catering company does not see any likelihood of booking a function in the next few days. If the catering company accepts this function, its income situation will be as follows: On the surface, the net loss appears unfavorable; however, considering we incur the $400 fixed cost whether we accept the function or not, we see a dif- ferent perspective of accepting the function. By selling below total cost of $760 ($360 + $400), we offset $240 of the $400 of fixed costs that would be incurred with or without the function. In the short run, as long as sales revenue exceeds variable costs and contributes toward fixed costs, it is beneficial to accept the business.
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