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

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.

 

You may also be interested in other articles from “cost volume profit relationship” chapter

  1. Contribution Margin and Basics of CVP Analysis
  2. Difference Between Gross Margin and Contribution Margin
  3. Cost Volume Profit (CVP) Relationship in Graphic Form
  4. Contribution Margin Ratio (CM Ratio)
  5. Importance of Contribution Margin
  6. Change in fixed cost and sales volume
  7. Change in variable cost and sales volume
  8. Change in fixed cost, sales price and sales volume
  9. Change in variable cost, fixed cost, and sales volume
  10. Change in regular sales price
  11. Break even point analysis (calculation of break-even point by contribution margin and equation method)
  12. Target profit analysis
  13. Margin of safety
  14. Sales Mix and Break Even with Multiple Products
  15. Cost Volume Profit (CVP) Consideration in Choosing a Cost Structure
  16. Operating Leverage and degree of operating leverage
  17. Assumptions of Cost Volume Profit (CVP) Analysis
  18. Limitations of Cost Volume Profit Analysis


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