Effect of Change in Regular Sales Price on Contribution Margin and
Profitability:
Learning Objectives:
- 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 |
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Quoted price per unit |
$170 |
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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.
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