Reducing price also reduces contribution margins

Assignment Help Business Economics

Reference no: EM131164775

(Marketting)When introducing new products, some manufacturers set a high initial price and then reduce price later. However, reducing price also reduces contribution margins, which in turn impacts profitability. To be profitable, the reduced price must sufficiently increase sales. For example, a company with a contribution margin of 30 percent on sales of $60,000,000 realizes a total contribution to fixed costs and profits of $18 million ($60 million x 0.30 = $18 million). If this company decreases price, the contribution margin will also decrease. So to maintain or increase profitability, the price reduction must increase sales considerably.

Refer to Appendix 2, Marketing by the Numbers, and calculate the new contribution margin for the company discussed above if it reduces price by 10 percent. Assume that unit variable costs are $70 and the original price was $100.

What level of total sales must a company capture at the new price to maintain the same level of total contribution as before the price reduction (that is, total contribution = $18 million) ?

Reference no: EM131164775

Questions Cloud

Analysis and recommendation for any hrm program : For your final project, you will prepare an overview, analysis and recommendation for any HRM program, policy and/or process identified as needing further review. This project will help you to demonstrate knowledge of topic and ability to articul..

Locational effect of varying prices in the weber model : What is meant by the locational effect of varying prices in the Weber Model? How does it impact a firm’s ultimate locational decision?

Discuss controversial aspect and their effect on our ability : The laws, presidential directives and executive orders that have formed. Discuss the controversial aspects and their effect on our ability to defend our country against terrorist attacks.

Perform complete kinematic analysis for one position : In Figure P1.3 an adjustable stroke mechanism is shown. The output link slides along the horizontal line, and the stroke is controlled by the position of the pivot point.

Reducing price also reduces contribution margins : (Marketting) When introducing new products, some manufacturers set a high initial price and then reduce price later. However, reducing price also reduces contribution margins, which in turn impacts profitability. To be profitable, the reduced price m..

Provide a brief background on the problem : Articulate the importance, context, purpose, and relevance of law in a business environment: Identify the parties who are before the court. Provide a brief background on the problem. Summarize the facts in no more than 2-3 paragraphs

Articulating a well-constructed learning objectives : What are the benefits of defining and articulating a well-constructed learning objectives statement?

Perform a complete kinematic analysis : For the loader shown in Figure 2.3, assume that rods 5 and 6 move during the same time interval (synchronized motion), but their velocities may be different.

Capital structure consists of equity : Ashraf Incorporated Ltd has assets with a market value of Rs.3 million. Its capital structure consists of equity, plus a loan of Rs.1, 000, 000 at an interest rate of 10 per cent per annum.

User Account

All Pages