Question

Explain the impact of increasing the unit selling price of a product on the company’s break-even point. Would the move to raise the unit selling price obviates the company from incurring a loss?

Answer 1

Answer:

If the selling price of a product is increased, it will result in the increase of the contribution margin from that particular product. when the contribution margin per units of product is increased the number of units required to cover the fixed cost or the break-even point will decrease. This is because each units will contribute more contribution for covering the fixed cost than earlier, therefore the number of units needed will be reduced.

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The move to raise the unit selling price does not obviates the company from incurring a loss. As the selling price incraeses it will affect those cost which are directly related with the selling price like Sales commissions. Moreover if the selling price is increased to a far extend it may even leads in the reduction of number of sales or the demand of the product which will affect the whole life of the product. It may even create a severe negative impact on the companies financial health.