How does changing sales price impact the contribution margin and break-even point?

Increasing the sales price generally improves the contribution margin and reduces the break-even point, while decreasing the price has the opposite effect.

The contribution margin is the difference between the selling price of a product and its variable costs. It represents the amount of money that contributes to covering fixed costs and generating profit after variable costs have been paid. When the selling price increases, assuming that variable costs remain constant, the contribution margin per unit will increase. This means that each unit sold will contribute more towards covering fixed costs and generating profit.

On the other hand, the break-even point is the level of sales at which total revenues equal total costs, i.e., the point at which a business neither makes a profit nor incurs a loss. It is calculated by dividing the total fixed costs by the contribution margin ratio (contribution margin per unit divided by selling price per unit). Therefore, when the selling price increases, the contribution margin ratio increases, leading to a decrease in the break-even point. This means that fewer units need to be sold to cover all costs and start making a profit.

Conversely, if the selling price decreases, the contribution margin per unit will decrease, assuming that variable costs remain constant. This means that each unit sold will contribute less towards covering fixed costs and generating profit. Furthermore, the contribution margin ratio will decrease, leading to an increase in the break-even point. This means that more units need to be sold to cover all costs and start making a profit.

Therefore, changing the sales price has a significant impact on both the contribution margin and the break-even point. It is a strategic decision that needs to be carefully considered, taking into account factors such as market conditions, competition, cost structure, and the price elasticity of demand for the product.