Question

Why might it be useful for a company to evaluate its prices more frequently than once per year? How might breakeven analysis help make it practical to carry out more frequent price evaluation?

Answer 1

Pricing of a product or service is very important for the survival of the business. Companies should review their prices regularly because customers are very keen on the price what they buy and what competitors offering. It also helps the companies to acquire more market share or maintain the share in particular industry. There are multiple pricing strategies like cost leadership, competition pricing etc where companies adopt to gain the market share.

Obviously breakeven analysis helps the companies to arrive at better pricing strategies. Breakeven point is the point where companies should sell the minimum number of units to cover all the costs. It is the point where your company does not many any gains or losses. Let me give an example:

Suppose, Manufactur A sells chairs and sales price per unit is $100. THe variable cost is $20 and fixed cost is $350,000.

Manufacturer should sell a minimum quantity to get breakeven is =Fixed cost/(Sales per unit-Varaible cost per unit)=$350,000/(($100-$20)=4375.

So Manufacturer A should sells 4375 quantity to cover all the costs. This mechanism helps how many a company can produce and maintain enough profitability to meet other obligations like interest and principal payments, capex etc.