The CEO Of Pride Company Was Very Happy With His Decision

The CEO of Pride Company was very happy with his decision to increase

The CEO of Pride Company was very happy with his decision to increase the sales price of the company's product because he believed that doing so would prevent the company from incurring further losses.

Do you agree with the thought process of the CEO? What is the impact of increasing the unit selling price of a product on the company’s break-even point? Would the move to raise the unit selling price obviate the company from incurring a loss? Explain your answer (300 words).

Paper For Above instruction

In managerial accounting, understanding the implications of pricing strategies on a company's profitability and break-even point is crucial. The CEO of Pride Company believed that increasing the selling price of their product would halt further losses. While this approach seems straightforward, it warrants a nuanced analysis grounded in cost behavior, contribution margins, and break-even analysis.

Initially, it is essential to understand that the break-even point is the level of sales at which total revenues equal total costs, resulting in neither profit nor loss. It is calculated using the formula:

Break-even point in units = Fixed costs / Contribution margin per unit

The contribution margin per unit is the difference between the selling price per unit and variable cost per unit. Increasing the unit selling price directly impacts the contribution margin, assuming variable costs remain unchanged. A higher contribution margin reduces the required sales volume to cover fixed costs, which in turn lowers the break-even point. Consequently, raising the selling price can effectively make it easier for the company to reach profitability, even if sales volumes decline slightly.

However, the assumption that simply increasing the price will obviate losses is overly simplistic. Several factors might influence the outcome. For example, price elasticity of demand determines how much the quantity sold will decrease as the price increases. If demand is elastic, a significant reduction in sales volume could negate the benefits of a higher contribution margin, potentially leaving the company still at risk of incurring losses or reducing profits.

Moreover, the ability to raise prices depends on market conditions, competitor pricing, and customer perceptions of value. If customers perceive the new price as too high, sales volume could decline sharply, and the company might not achieve the desired break-even point. Conversely, if the demand is relatively inelastic, the higher price may lead to increased revenue and profitability without substantial loss in sales volume.

Therefore, while increasing the unit selling price can lower the break-even point and potentially help avoid losses, it does not guarantee it. The move must be complemented by a thorough analysis of demand elasticity, competitive landscape, and overall market conditions. Additionally, cost management and operational efficiencies play critical roles. Ultimately, strategic pricing should be part of a comprehensive approach towards profitability, rather than a sole reliance on price increases to stop losses.

References

  • Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2014). Introduction to Management Accounting. Pearson.
  • Drury, C. (2013). Management and Cost Accounting. Cengage Learning.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
  • Hilton, R. W., & Platt, D. (2018). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
  • Anthony, R. N., Horngren, C. T., Sunden, G., & Strauss, R. (2014). Management Control Systems. Pearson.
  • Kaplan, R. S., & Atkinson, A. A. (2015). Advanced Management Accounting. Pearson.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. Wiley.
  • Langfield-Smith, K., Thorne, H., & Hilton, R. (2015). Management Accounting: Information for Decision-Making and Strategy Execution. McGraw-Hill Education.
  • Shim, J. K., & Siegel, J. G. (2012). Financial Management and Accounting Principles. Barron's Educational Series.
  • Banker, R. D., & Datar, S. M. (1989). Sensitivity Analysis in Managerial Cost Systems. Journal of Accounting Research, 27(1), 148-167.

Related Assignments