Section 1: Marginal Investment Decisions — Should You Produce More?
Scenario 1: Demand Increases from 700 to 1000 Units
Analysis:
You initially planned for 700 units. With demand increasing to 1000 units and a selling price of ₹2,500, you evaluate the additional 300 units.
Step-by-step Calculation:
- Incremental Units: 1000 - 700 = 300 units
- Incremental Revenue = 300 × ₹2,500 = ₹750,000
- Incremental Cost = 300 × ₹1,000 = ₹300,000
- Incremental Profit = ₹750,000 - ₹300,000 = ₹450,000
Decision:
Yes, you should produce more — profit increases by ₹450,000.
Scenario 2: Demand Increases from 1000 to 1100 Units
Analysis:
You’re currently producing 1000 units. Increasing to 1100 units introduces a fixed overhead cost of ₹1,000,000 beyond the standard ₹1,000/unit variable cost.
Step-by-step Calculation:
- Incremental Units: 100
- Incremental Revenue = 100 × ₹2,500 = ₹250,000
- Incremental Cost = (100 × ₹1,000) + ₹1,000,000 = ₹1,100,000
- Incremental Profit = ₹250,000 - ₹1,100,000 = -₹850,000
Decision:
No, producing more results in a loss of ₹850,000.
Scenario 3: Demand Increases from 1000 to 1500 Units
Step-by-step Calculation:
- Incremental Units: 500
- Incremental Revenue = 500 × ₹2,500 = ₹1,250,000
- Incremental Cost = 500 × ₹1,000 + ₹1,000,000 = ₹1,500,000
- Incremental Profit = ₹1,250,000 - ₹1,500,000 = -₹250,000
Decision:
No, you incur a loss of ₹250,000.
Scenario 4: Demand Increases to 1667 Units
Step-by-step Calculation:
- Incremental Units: 667
- Incremental Revenue = 667 × ₹2,500 = ₹1,667,500
- Incremental Cost = 667 × ₹1,000 + ₹1,000,000 = ₹1,667,000
- Incremental Profit = ₹1,667,500 - ₹1,667,000 = ₹500
Decision:
Neutral — No profit, no loss (breakeven).
Section 2: Pricing Strategy – Toy Business Case Study
Case 1: Finding Break-Even and Profit Margins
Situation:
- Machine cost: ₹1,000,000
- Machine life: 1,000 toys
- Variable cost/toy: ₹1,000
Step-by-step:
- Break-even Price = ₹1,000 (variable) + ₹1,000 (fixed/1000 toys) = ₹2,000
- Price for 10% profit = ₹2,000 × 1.10 = ₹2,200
Case 2: Forecast vs. Reality
Situation:
- Forecasted selling price: ₹2,200
- Actual market price: ₹1,900
- Machine resale value: ₹500,000
- Fixed investment (F): ₹1,000,000
- Variable cost (OC): ₹1,000 per toy
Decision Criteria:
- Continue if R' - OC > 0
- Ignore sunk cost (machine investment); evaluate only incremental operating profit
Step-by-step:
- Revenue per toy (R') = ₹1,900
- Operating cost (OC) = ₹1,000
- Profit/toy = ₹900
- If demand > 555 toys, continuing is better (₹900 × 556 > ₹500,000 loss on resale)
Decision:
Continue producing if expected toy sales > ~555 units.
Key Concepts:
1. When to Expand Production?
Only if incremental revenue > incremental cost, including any fixed costs triggered by scaling.
2. Pricing Based on Costs vs. Market
- Cost-Plus Pricing: Add markup to cost
- Market-Based Pricing: Start with customer willingness to pay
3. Consumer Pricing Sensitivity
- Driven by perceived fairness, trust in seller, and reasons for price change (e.g., inflation vs. opportunism)
4. Inflation Response Strategies
- Cut costs, hedge inputs, smartly segment prices, bundle strategically, and communicate transparently
