Price limit
The price for a product results from the interplay of supply and demand . However, certain price limits still apply to every company . Failure to observe them can lead to losses or even bankruptcy .
In general, a distinction must be made between upper and lower price limits. The upper price limit indicates the maximum willingness to pay when purchasing z. B. Material for production again, it is usually quite easy to determine. The lower price limit represents the minimum sales price for the finished product.
Types of price floors
In line with the company's goals, there are no lower price limits. The strategic lower price limit , which relates to the potential for success , includes the costs that are required for product development in the long term. You can z. B. determine with the experience curve . The financial price floor relates to liquidity . It is mainly used in companies with a tight liquidity situation. The price is used to cover the cash costs that are incurred until the product is completed. Most companies place the focus on the profit-economic lower price limit , with which the company goal of success is to be achieved.
Profitable lower price limit
Given capacities
If a company still has free capacity in a bottleneck , an additional order can be produced without any problems. The lower price limit is set based on the duration of this additional order. If it is only unique, then only the marginal costs of production are used. However, if the order is long-term, then all costs must be included.
If the company is already at full capacity, the additional order would displace the production of other products. Therefore, the opportunity costs for the lost production of the other products must be added. Only then can a decision be made to accept this order. The order is to be accepted if the opportunity costs are lower than the proceeds from the additional order.
Variable capacities
The lower price limit for variable capacities is an investment problem . If the sales of the products decline, the company must decide when a disinvestment or temporary shutdown is worthwhile. If sales increase, a decision must be made as to whether additional machines should be purchased.
Short-term lower price limit
The short-term lower price limit for a product is therefore where the contribution margin is zero. This amount covers the variable , but not the fixed costs . This means that the company has to accept a loss equal to the fixed costs in the long term.
For more details on the short-term lower price limit, see above all the operating minimum
Long-term lower price limit
The long-term lower price limit with which a company can operate without losses therefore corresponds to the full cost of sales . The long-term lower price limit can only be correctly determined with a VOFI .
For more details on the long-term lower price limit, see above all operating optimum