When making the determination of whether or not a selling price should be increa

Question

When making the determination of whether or not a selling price should be increased there are many different aspects to take into consideration. Paulsen Company sells only one product. The regular selling price is $50. Variable costs are 70% of this selling price, and fixed costs are $7,500 per month.

Management decides to increase the selling price from $50 to $55 per unit. Assume that the cost of the product and the fixed operating expenses are not changed by this pricing decision. In a response of 400-600 words answer the following:

What cost-volume relationships should Paulsen take into consideration for the original price and the proposed new selling price?

Discuss the non-monetary factors that should be taken into consideration before raising a selling price.

Explanation / Answer

1---------------In cost volume relation breakeven sale calculation is most importanat aspect.

Break even sales are the point at which there is no profit or no loss.

Break even sales are calculated as === fixed cost/fixed cost per unit

Hence

7500/50*.30=500 units are required ot ber sold to cover the fixed cost and have zero profit or zero loss.

If this sale price is increased to $55 then new break even sale is

7500/55*.30=455 units.

If the sales price is increased then firm has to sell less units to cover the fixed cost.

2---------Below are the non-monetary factors that are to be consider before raising the selling price of the product.

Demand for the product?

Competitors in market?

Demand can be postponed or not?

Nature of the product?

Availability of substitutes?

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