Question

When making the determination of whether or not a selling price should be increased there are many different aspects to take into consideration. Paulsen Company sells only one product. The regular selling price is $50. Variable costs are 70% of this selling price, and fixed costs are $7,500 per month.

Management decides to increase the selling price from $50 to $55 per unit. Assume that the cost of the product and the fixed operating expenses are not changed by this pricing decision. In a response of 200 words answer the following:

1. What cost-volume relationships should Paulsen take into consideration for the original price and the proposed new selling price?

Answer 1

Solution:

There are variaous factors that should paulsen take in to consideration for the original price and new selling price.

1. Breakeven Sales:

This is a important factor in cost volume relationship. At breakeven sales total revenue is equal to total cost. Breakeven units are the number of units that company must sell in order to save itself from losses.

At original selling price, contribution margin per unit = $50 * 30% = $15

Fixed cost = $7,500

Breakeven units = Fixed cost / contribution margin per unit = $7,500 / 15 = 500 units.

If company increase the price to 55 then new contribution margin per unit = $15 + $5 = $20 per unit

New breakeven point = $7,500 / 20 = 375 units

Hence number of units to be sold at breakeven decreased as a result of increase in selling price.

2. Apart from breakeven point, there are other factors that should be considered before increasing the prices such as competitor prices, substitute available in market, branding of your products, demand of product etc.