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1. A popular position expressed by consumers is that if firms would simply reduce the price...

1. A popular position expressed by consumers is that if firms would simply reduce the price charged for a product, the result would be the firm would sell more product and make more profit. Should the manager of the agribusiness follow the advice from the customers? Use the following example to illustrate your answer. Assume the selling price for the product is $10 per unit and the variable costs per unit are $6. If the price is reduced by 10 percent or $1, what would be the impact on the breakeven point? Assume fixed costs are $1,000.

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Answer #1

Earlier selling price of the product = $10..

variable costs per unit = $6 and fixed costs = $1000..

break even point = $1000/($10-$6) = $1000/$4 = 250 unit..

now the reduced price is = $10 - $1 = $9..

new break even point = $1000/ ($9-$6) = $1000/$3 = 334 unit..

hence, the break even point will increase and u need to sell more to reach profit..

Reducing the selling price will definitely increase the volume of sale, but the break even point is now increases significantly. Hence, they will not make more profits by selling more units.

So, the manager of the agribusiness should not follow the advice from the customers...

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