In the short run, sales revenues need only cover the differential costs of production and sale. So, from a short-run perspective, so long as the sale does not affect other output prices or normal sales volume, a “below cost” sale may result in a net increase in income so long as the revenues cover the differential costs. However, in the long run all costs must be covered or management would not reinvest in the same type of assets. If the company must continually sell below the full cost of production then it will most likely get out of that particular business when it comes time to replace those facilities. The manager is correct when looking at the long-term picture, however, in the short-term this statement is not necessarily true. In the short-run a manager can accept certain below-cost orders, so long as the differential costs increase operating profit. If operating profit stays the same or decreases there really isn't any insentive for the company to take on the order. However, the company has to be careful in the long-run because if they take on too many of
This is the end of the preview. Sign up
access the rest of the document.
This note was uploaded on 10/29/2009 for the course ACC 066 taught by Professor Kwak during the Spring '08 term at DeAnza College.