# Models of pricing for multinomenclature production...

## Models of pricing for multinomenclature production of a transnational company

In modern conditions, any transnational company produces, as a rule, several types of products. It is driven by many reasons, the main one being the possibility of eliminating the risk inherent in a business with one type of product. An equally important reason for increasing the nomenclature is the desire of the company to increase the degree of utilization of the production capacity of its enterprises. Indeed, if the current production does not use the company's production resources at an optimal level, then a certain part of its permanent resources is lost. If any other products can be produced at the same time and sold at a price exceeding its marginal costs, then the company should do it.

The model for calculating optimal prices under multinomenclature production is shown in Fig. 21.2.

Analyzing Fig. 21.2, we can draw the following conclusions.

■ There is only one marginal cost curve - MS, regardless of which product is produced.

■ The marginal revenue curve for the product A intersects the ordinate at the point Z and the abscissa at Q2. If only the product A, is produced, then the profit-maximizing production is equal to Q1 units, which is the production level at which MR = MS (at the point R ).

■ Production capacities outside the Q1 units are available for the production of the product B. Assume that the production of the product A is stopped at the point Q1 and the production of the product B begins. The vertical dashed line from Q1 becomes the origin of the diagram of marginal revenue from product B (also shown in dotted lines).

Fig. 21.2. Determination of prices in multi-product production conditions

This line of marginal income MR B passes through the points U and Qs, crossing the marginal cost curve at the point V, which corresponds to the total volume of production in quantity of Q3 units of products A and B. Thus, it is necessary to produce units of product A and (Q3 - Q1) of product units B.

■ Production of Q3 units of products A and B is not optimal, because MR B at point V is clearly greater than MR a in point R. The rule of distribution of production volumes is that the marginal revenue A and B should be equal to each other and marginal costs. You can increase profits by producing fewer units of product A and introducing savings into product B.

■ Change the product structure by moving the triangle UQ1Q5 to the left. It should be remembered that the left side of the shifting triangle marks the upper limit of the production of product A, and the right side (hypotenuse) is MR B. As the triangle moves to the left, the intersection between MR B and the MC, which starts at point V, will move down the MC curve . At the same time, the intersection between the left side of the triangle and MR a, which starts at point V, moves upward along the curve MR A. The offset of the triangle should end when it reaches the position TQ a Q 4, because at this position MR a at the point S are equal B at the point W, and both are MC. The points S and W lie on the horizontal line lines of equal marginal revenue so that MR A = MR B = MS. This satisfies the conditions for maximizing profit.

■ Optimal production volumes are equal to Q A of product units A and (QB - Q a ) of product units B.

This process can be extended to any number of product units until the marginal cost curve changes.

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