I (Meaning and importance of Exports) Unit Structure

10.4 MARGINAL COST PRICING 
10.4.1
MEANING 
 
This suggests allocation of fixed cost over a period of time 
and not in the short run. The export price should be as minimum as 
possible to compete in the export market. Expenses incurred for its 
domestic operations should be taken out from total export price. 
Exporter should recover fixed cost even from domestic market if 
export market is more competitive. Only variable costs should be 
recovered from export market. The rational behind this is that fixed 
costs don‟t change according to volume, variable costs change by 
volume of production marginal cost therefore move around variable 

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costs. This suggests that export price should be equal to marginal 
cost, which can fully recover variable cots. Any excess price of 
marginal cost should be attributed to fixed cost and the excess 
there of the profit. 
10.4.2 ADVANTAGES OF MARGINAL COST PRICING: 
The following are the advantages of marginal cost pricing. 
1. Price may be used as a weapon to penetrate into the 
overseas market. 
2. This method may be used as an alternative to face 
competition effectively. 
3. Fixed costs and sometimes, variable costs are realized from 
the home market. 
4. By fixing reasonably lower price, consumers from developing 
countries, with limited income, can be better attracted. 
10.4.3 DISADVANTAGES OF MARGINAL COST PRICING: 
The following are the disadvantages of marginal cost pricing. 
1) When a price is fixed at reasonably lowest for the overseas 
market by reducing marginal costs, it becomes difficult to 
increase the price at a later stage when the total costs of 
production are increased. 
2) This method of pricing is not at all advisable to a producer 
who mainly concentrates to export marketing. 
3) The industry where the proportion of variable costs are on 
higher side, cannot afford to the marginal cost pricing. 
4) The industry in which raw materials constitutes a large 
proportion of the total costs, also cannot afford to such 
pricing. 
Marginal cost approach is suitable in the large home market 
and where the goods are manufactured for mass consumption.