Determines the effect of price reduction:
In order to enhance the sales, management of Quality ice-cream company decided to give discounts in the sale of one and half liter packages. One of the effects of the policy is the reduction of average sales price from Rs. 50 to Rs. 45. Determines the effect of this price reduction on the volume of ice cream to be sold to obtain break-even.
The proposed change in average sales price results in the change of contribution margin per liter from Rs. 12.75 to Rs. 7.75, that means
Contribution margin = Proposed sales price - Variable costs per unit
= 45 - 37.25
= Rs. 7.75
But it does not influence the fixed costs and thus the unit sales volume required for break even would be:
Sales Volume (in liters) = 55,000 / 7.75
= 7097 liters
This new target needed for break even, 7097 liters, is more than 60% higher than the present break even volume of 4314 liters. Therefore the management shall exercise the proposed policy into practice, only if the sales are expected to increase by a volume more than 60% per month, which is very hard.