Question

A manager in your organization just received a special order at a price that is “below cost.” The manager points to the document and says, “These are the kinds of orders that will get you in trouble. Every sale must bear its share of the full costs of running the business. If we sell below our full cost, we'll be out of business in no time.” What do you think of this remark?

Answer 1

If a order is received at a price that is "below cost", it means that the seller had loss while selling that product. Loss in a business is not ideal. A business can only survive if it is making profits(which means that if selling price is more than cost).

In the above mentioned question manager points to the order and says, “These are the kinds of orders that will get you in trouble. Every sale must bear its share of the full costs of running the business. If we sell below our full cost, we'll be out of business in no time.”

According to his statement he means that the order which he has received is below cost and if seller continues to sell itmes on the lower rate then soon he will be running in losses and will left with no business to do. If a business has to survive in long term then it has to run on profits, he must sell products on the price above the cost. If each and every sell would bear the cost and makes profit only by then the business will be able to survive in the long term.

He has correct point of view to make the business survive in long term. But sometimes when there is no sell or entrepeneurs are thinking to close the business then sometime just to clear the remaining stock they start selling products below the cost price and the reason behind them doing this is that something is better than nothing. For example: If a firm ABC is thinking to shut down their business as they are not able to make any sell in the past 4 months. They are engage in selling laptops. Suppose that their cost price is $400 and they add a profit margin of 30% which makes their seling price $520. Now if they are not able to sell it in $520 then they will start giving discounts to the customer to attract sell. Now if they are not able to sell it even after giving a discount of whole $120(their total profit margin) so now just to sell it or just to recover some amount they will start selling it in loss.

So, the remark of your manager was correct but sometimes due to some problems and certain situaitons companies have to sell their product below cost but it is not ideal for long run businesses.