Question

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

Hint:

When analyzing business strategies, consider the broader objectives of minimizing losses, covering fixed costs, and maximizing profits in the context of the available market conditions.

Answer 1

The Correct Option is C

In the given scenario, the company has to sell 40% of its output at a reduced price (20% lower) in a foreign market. The company is following a strategy known as "dumping", where the price is set lower than the average cost but higher than the average variable cost. The objective of such a strategy typically includes: 
Objective 1: To maximize profits. 
Although the company is selling below its average cost, it still aims to maximize profits in the foreign market by increasing the total number of units sold. This is often done to offset losses from the domestic market. 

Objective 2: To contribute to the recovery of fixed costs. 
By dumping the output in the foreign market, the company aims to cover some of its fixed costs, as these costs do not change with the level of production. Selling the output at a price above the variable cost helps to recover these fixed costs. 

Thus, the correct answer is a combination of (C) and (B).