Cost-Volume -Profit Analysis 123Dumping
If a foreign company is the predator, there is no inherent difference in the tac-
tics or the goal of predatory pricing. Pricing below variable cost would still re-
main a valid test. However, U.S. law imposes a stricter test on foreign than on
domestic companies. The legal test for dumping does not involve variable cost.
Rather, it focuses on whether the foreign company is selling its product here at
a price less than the price in its home market.
Dumpingis simply predatory pricing by a foreign company. So the logic
that supported using variable cost as a test for predatory pricing would also
support using the same test for dumping. But the test actually used is the
domestic selling price (usually higher than variable cost). This test makes it
easier to prove dumping than to prove predatory pricing. It favors the domestic
firms and is harder on the foreign company. This may be a matter of politics as
well as one of economics.
Perhaps the best-known cases of dumping have involved the textile and
steel industries. Another recent case of dumping concerned Japanese auto
companies accused by U.S. competitors of dumping minivans in this country.
Also, the Japanese makers of f lat screens for laptop computers (active matrix
liquid crystal displays) were alleged to have sold their products in the United
States at prices below those in the home market.
It is not always easy to ascertain the home market selling price. Even if
there are list prices or catalog prices in the home market, there may be dis-
counts or rebates that are difficult to detect. Therefore, instead of using the
home market selling price as the test, the production cost may be used instead.
This is reasonable, because the production cost is likely to be below the home
market selling price. Therefore a dumping price below production cost is vir-
tually certain to be also below the home market selling price. But production
cost includes both fixed and variable costs and is therefore above variable cost.
Also, it may be arguable as to what should be included in production cost. For
example, some may include interest expense on money borrowed to purchase
manufacturing material inventories. Others may believe that interest is not
part of production cost.
If it is determined that dumping has indeed taken place, then the U.S. In-
ternational Trade Commission (ITC) will impose an import duty on the foreign
product involved. This duty will be sufficiently high to boost the U.S. selling
price to the same level as the home market price.
Dumping has a large potential impact on businesses and industries in our
economy. By extension, production cost is also a subject that successful busi-
nesspeople will find profitable to understand.
FOR FURTHER READING
Garrison, Ray, and Eric Noreen, Managerial Accounting,8th ed. (New York: McGraw-
Hill, 1999).
Hilton, Ronald, Managerial Accounting,4th ed. (New York: McGraw-Hill, 1998).