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Such short-term selling price constraints
must be applied very carefully since the company has to cover its fixed
costs in the long-run, and long-run pricing should aim to enable it to
do so. As a basis for coping with unexpected short-term situations such
an analysis is appropriate. However, if such short-term situations occur
repeatedly, they can hardly be considered 'unexpected' and steps should
be taken to prevent them recurring, or plan for them by reducing the budgeted
capacity. It should be noted that too many special 'bargain' offers are
also likely to affect the normal selling price in the longer term or put
sales representatives in a difficult situation with normal customers.
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Make or Buy Decisions
Manufacturing companies are frequently faced with
a choice of either making a component or product in-house, or purchasing
it from an outside supplier. In the short-term, such decisions usually
arise where a cheap outside source for an in-house produced component
is found, and/or where productive capacity is limited in-house, and
purchasing outside will allow productive resources to be redeployed.
Using the example above, if 2,500 units of Product
A could be obtained from an outside supplier for £1 per unit and there
was no alternative use for productive resources, then (using the relevant
costing approach) the company must weigh up the cost savings it will
make by reducing its own production of Product A by 2,500 units, against
the cost of purchasing those units (£2,500).
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