Question

In a strategy meeting, a manufacturing company’s president said, “If we raise the price of our product, the company’s break-even point will be lower.” The VP for finance said “sure, then we should raise our price so that the company is less likely to incur a loss.” Do you agree with the president? Why or why not? Do you agree with the VP for finance? Why or why not?

Answer 1

Answer:

The president is right . A price increase brings about a higher unit contribution margin . An increase in the unit contribution margin causes the break - even point to decrease.

The financial VP 's thinking is flawed.Even however the break-even point will be lower ,the price increase won't really decrease the probability of a loss .Customers will most likely be more averse to purchase the item at a higher price.Thus the firm might be less inclined to meet the lower break-even point (at a high price) than the higher break - even point ( at a low price).