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Study Stuff for MCA Examinations - NIMCET
Study Stuff for MCA Examinations - NIMCET
Previous Year Question (PYQs)
Average Cost (AC) is defined as the sum of Average Fixed Cost (AFC) and Average Variable Cost
(AVC), and dumping is defined as selling a product at a price less than AC but more than AVC. A
company in India, suddenly, found that the demand for its product "ZOOM" has fallen to 60% of the
output produced in that financial year. As a result, the company must sell 40% of the produced
output in a foreign market. If it decides to "dump" 40% of its output in a neighbouring country (by
reducing the price by 20%), what would be the objective of its 'dumping strategy', among the
following? (The company has set a profit margin of 10% of AC while fixing the price of its product
for sale in India).
(a) To minimize losses,
(b) to maximize profits,
(c) to contribute to the recovery of fixed costs,
(d) to contribute to the recovery of variable costs
(a) To minimize losses,
(b) to maximize profits,
(c) to contribute to the recovery of fixed costs,
(d) to contribute to the recovery of variable costs
Solution
Selling at a “dumping” price means the product is sold below AC but above AVC.
-
So, the firm covers all variable costs and earns something to help recover fixed costs.
-
This doesn’t maximize profit, it just minimizes loss and helps recover fixed costs.
Therefore, both
(a) To minimize losses and
(c) To contribute to the recovery of fixed costs
are correct.
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