Additional Sales Volume Required to Offset a Reduction In Selling Price
The sales manager on the basis of a market research/survey may report to the management that due to increased compunction in the market and the liberal import policy of the government, the present price is relatively higher. He may advise reduction in prices to stay in competition.
Suppose that SV Ltd reduces its selling price from Rs 10 a unit to Rs 9. The sales volume needed to offset reduced selling price/maintain a' present operating profit of Rs 12.000 would be:
The required sales volume of Rs 1.14.000 represents an increase of about 20 per cent over the present level. The management should explore new avenues of sales potential to maintain the existing amount of profit.
On the other hand, if the firm has the opportunity to increase the unit selling price of the product. The impact of increased sales price would be that the BEP will be reached sooner because an increase in the selling price will raise the contribution margin, assuming no change in the variable costs. An increased contribution margin will decrease the sales volume necessary to reach a desired goals.