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Sales - Optimisation Model Pricing And Variations In Fixed Costs

  Sales - Optimisation Model Pricing and Variations in Fixed Costs

        A significant implication obtained from sales optimisation postulation by Baumol is the effect of variations in fixed or overhead costs on prices of commodities. Conventional price thesis depends on profit optimisatio0n asserts that as long as overhead costs do not change with productivity the variations in them would not influence prices of the commodities and not even productivity manufactured of the commodities.

        However alternatively, it has been observed that in actual practice the variations in overhead costs do affect the prices and productivities. Therefore, Baumol remarks “This piece of received principle is definitely at variance with business practice where an enhancement in fixed costs is generally the occasion for serious consideration of a price change.

        Now, Baumol asserts that sales optimisation postulates with its minimum profit restraint can describe and rationalise the variation in prices consequenting of variations in overhead costs, while profit optimisation as pointed above cannot consider for it.

            If an industry selects to optimise sales with a minimum acceptable profit restraint and is at symmetry then the rise in overhead cists would bring about enhancement in aggregate cost and as an outcome the profit of the industry will drop below the minimum acceptable profit level.

            With respect to stop this drop in the profit level and to be at symmetry again, the restrained sales optimising industry will decrease the manufacture if the commodity so as to increase the selling price of the commodity.

        Now, let us discuss the diagram. Where only aggregate profit curves bereft of aggregate cost and aggregate revenue curves are represented. To start with, let us assume as follows – provided a definite cost and revenue condition, aggregate profit curve is R1R’1. If ORm is the minimum profit restraint then sales optimising industry with ORm as the minimum profit restraint will be at equilibrium at productivity IS.

        Alternatively, profit optimising industry will be at symmetry at OP productivity. Now, presume that there is an enhancement in overhead costs by the volume R1R2. With this enhancement in overhead costs, there will be a similarity downward movement in the aggregate profit curve by the volume of R1R2.

        Therefore, after the movement we get an aggregate profit curve R2R’2 – denoted as dotted lines. It will be noted from the diagram that even with the new profit curve R2R’2, profit optimising productivity stays at the same OP level.

            Therefore, the enhancement in the overhead costs minimise the height of the profit hill uniformly however they do not vary the location of its peak. But a sales optimising industry with ORm as the profit restraint will be deducted to OS'.

        This deduction in productivity will allow the industry to enhance the selling price of the commodity. Therefore, as per Baumol, with the postulate of sales optimisation with a minimum profit restraint we are better able to rationalise the businessman’s mannerism considering variations in prices and productivity in accordance to variations in overhead costs.

        As the consequences of variations in overhead costs on prices and productivity, sales optimisation can also better describe the impact of corporation income tax on prices and productivity.

        It may be noted that corporation income tax on the profits of the public limited companies. The study of the consequences of corporation income tax on the price and productivity is exactly the same as of variation in overhead cost and R1R2 in the diagram can be treated as the volume of corporation income tax that has been levied.

        As per conventional price thesis depends on profit optimisation, an industry cannot do anything to move any part of the corporation income or profit tax to the consumer or its labourers.

        Nor a profit optimising industry can gain anything by raising the price or varying its productivity as an outcome of the levying of this corporation income tax on a company, provided the rates of the tax are so predetermined that the larger the volume of profits optimising industry stays unaltered consequenting levying of or variations in corporation income tax.

        Therefore, according to Baumol, - the argument is likely to match the same as the fixed cost scrutiny. The corporation tax decreases the height of the aggregate profit curve; however it moves the peak of the curve neither to the right nor to the left. Nevertheless, if the industry’s aim is optimisation if sales with a minimum profit restraint, the price will be mounted and productivity decreased when corporation income tax is increased.

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