Effect of Change in Regular Sales Price on Contribution Margin and Profitability:

Learning Objectives:

1. What is the effect of changing regular sales price on the contribution margin and profitability of the firm?

The following data is used to show the effect of changes in sales price on contribution margin and profitability.

Basic Data:
Selling price: \$250 (100%)
Variable Expenses: \$150 (60%)
Contribution Margin: \$250 – \$150 = \$100 (40%)
Fixed Expenses: \$35,000 per month

The company is currently selling 400 units per month. The company has an opportunity to make bulk sale of 150 units to wholesaler if an acceptable price can be worked out. This sale would not disturb the company’s regular sales and would not affect the company’s total fixed expenses. What price per unit should be quoted to the wholesaler if company wants to increase its monthly profits by \$3,000?

Solution:

 Variable cost per unit \$150 Desired profit per unit 20 ———- Quoted price per unit \$170 ======

Notice that fixed expenses are not included in the computation. This is because fixed expenses are not affected by the bulk sale, so all of the additional revenues that is in excess of variable costs increase the profit of the company.