Learning Outcomes
- Prepare a statement that shows a change in fixed cost, selling price, and sales volume
Your boss just walked in, and she looks angry and somewhat concerned. Your competitors just released a product identical to your widget, but they are selling it for 20% less than your current selling price. Not only that, but their widget comes in nine different colors, and you only have two! This could cause problems on more than one level.
- Your volume of sales may go down with the increased competition.
- Your pricing will need to be changed to meet the new competitive environment.
- You may need to make some changes to your product line to stay competitive.
What if, at the same time, you get word that your fixed expenses are increasing 10% this next month due to increased insurance costs? How in the world are you going to deal with all of these changes, not only in the marketplace, but in your costing process? Well it is time to do some number crunching, and see how to make changes that will keep your department and your company profitable.
Back to Monte and their current CVP analysis.
Let’s first look at our current situation on pricing, fixed and variable costs:
| Number Sold | 1 | 50 | 100 | 150 | 200 |
|---|---|---|---|---|---|
| Price per Item/sales | $10 | $500 | $1,000 | $1,500 | $2,000 |
| Variable cost per item | $5 | $250 | $500 | $750 | $1,000 |
| Contribution Margin | $5 | $250 | $500 | $750 | $1,000 |
| Fixed Costs | $400 | $400 | $400 | $400 | $400 |
| Profit (loss) | ($395) | ($150) | $100 | $350 | $600 |
So we need to determine a price that is competitive with the new widget that just hit the market. Do we want to meet or beat their price? Well, for now, let’s look at meeting their price. Our boss said we are looking at a 20% lower cost for our widget to meet them. So, if we are currently selling at $10 each we will need to discount those widgets:
$10 − $2 (20% of $10) = $8 per widget as our new selling price.
But don’t forget, we also got handed a 10% increase in our fixed costs:
$400 + 10%($400) = $400 + $40= $440 per month fixed costs. Let’s see what this does to our CVP analysis:
| Cost-Volume-Profit | |||||
|---|---|---|---|---|---|
| Monte Corporation | |||||
| Number Sold | 1 | 50 | 100 | 150 | 200 |
| Price per Item | $8 | $400 | $800 | $1,200 | $1,600 |
| Variable cost per item | $5 | $250 | $500 | $750 | $1,000 |
| Contribution Margin | $3 | $150 | $300 | $450 | $600 |
| Fixed Costs | $440 | $440 | $440 | $440 | $440 |
| Profit (loss) | ($437) | ($290) | ($140) | $10 | $160 |
We now need to sell 150 widgets before we start to show a profit. So a combination of pricing changes and additional costs shifts the number of widgets we need to sell to begin to make a profit. Before these changes, we needed to sell less than 100 to show a profit. This is a challenge that you may face as a manager. Can you think of any ways to combat this problem?
Practice Questions
