What is the impact of increasing the unit selling price of a product on the company’s break-even point.

The CEO of Pride Company was very happy with his decision to increase the sales price of the company’s product because he knew that in doing so to company will cease incurring any further loss. Do you agree with the thought process of the CEO? What is 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? Explain your answer (300 words).

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Q. The CEO of Pride Company was very happy with his decision to increase the sales price of the company’s product because he knew that in doing so to the company will cease incurring any further loss. Do you agree with the thought process of the CEO? What is 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? Explain your answer (300 words).

Ans. In order to answer this question, we need to first understand what exactly the break-even point is. In marketing terms, it is the volume of activities at which a company’s revenue and expenses are equal. The formula for calculating the break-even point is dividing the total fixed costs by contribution margin per unit, and this contribution margin per unit is determined by subtracting the variable costs and expenses from the product’s selling price (Hilton and Platt, 2020). Technically, one can reduce the break-even point by increasing the contribution margin per unit. There are some strategies that can be used to increase the contribution margin per unit, like reducing variable costs and expenses per unit. Another strategy can be to increase the selling price of the unit. Thus, an increase in the selling price of a product would lower the break-even point for a company’s revenue sheet. However, there are certain conditions to this situation. The company has to be very careful while increasing the selling price as this could directly affect the number of units being sold. If the price is way too high, there is likely going to be a significant reduction in units being sold. That will, in turn, increase the break-even point.

Hence, it could be agreed upon that the CEO of Pride company is not wrong on his stand regarding the increase in the selling price of his products. Although I agree with this opinion, I feel the CEO should analyze the risks that come with it. The company will only be able to recover costs if the variable costs are reduced and the selling price is increased slightly and not drastically. This move does not obviate the company from incurring losses but could be tried after careful market research and product strategy development.

References

R., & Platt, D. (2020). Managerial Accounting: creating value in a dynamic business environment. New York: McGraw-Hill Education.

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The increase of a price when selling products for a certain amount of units decreases the unit cost of the product by not selling the required amount of units for that price. At this point, it does not matter what the result of the move to raise the unit selling price is. The difference between the price per unit in the market and the unit selling price could be a significant difference. Moreover, this will determine the profit and the sales, as well as the profit that the company faces. It will reduce the profit of the company from the sales in the market. If the sales growth is driven by increasing the unit selling price, there is a possibility that the increase in the unit selling price won’t generate any profits in the markets or would not generate profits in the markets. This is why a decrease in the unit selling price will not affect the profitability of the company. A company may incur certain costs related to any product that it sells, and it may incur some costs from the purchase of units through the market and sales of units. The company may incur some costs for the additional product it sells, for example, in sales of its units (Zimmerman, 2017). The company may incur in sales of units some cost to produce the unit. This is referred to as manufacturing costs, for example, the price for raw material, packaging, labor, and the like. The company may incur some cost for additional service to its company that it provides for the company’s customers. For example, it is marketing, sales, marketing, and maintenance services to the company. The company may incur some costs for other services the company offers, for example, it is accounting, finance, accountancy, and legal services for the company. The price increases of a product may increase the profit by using the sales of the unit that the product provides for the company. If the company takes advantage of the rise of the unit price of a product by selling the required amount of units, will the company acquire more units or not. The increase in the unit selling price is mainly motivated by the increase in the unit selling price, but the profit margin is not affected by the increase in the unit selling price (Zimmerman, 2017).

The increase in the unit selling price affects both the profit margin and the profit margin of the company as a whole. The increase in the price of a product is primarily a reflection of the more significant amount of money spent on the marketing of the product. The amount spent on marketing a product can lead to a reduction in revenue. So the increased price is indeed a reflection of marketing expenses. The high unit selling price is inversely proportional to the higher revenue per unit sold of a product. As such, the increase in the unit selling price does not cause the company to incur a loss due to the price increase (Zimmerman, 2017).

Reference

Zimmerman, J. L. (2017).  Accounting for decision making and control (9th ed.). New York, NY:  McGraw-Hill Education.