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Mk 4010- Computing Percent Breakeven Price Change

# Mk 4010- Computing Percent Breakeven Price Change -...

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Computing Percent Breakeven Price Change We want to know how a price change will affect profitability. We have a simple formula: %Profit BE P = - change CM / New CM where CM is contribution margin. And note the negative sign: it’s important. (In class, I made a mistake. I used old CM in the denominator, when I should have used new CM, or CM after the change.) Let’s run through examples, do this the right way. Let’s start with King of Pops. Inn the example in your slides: Current Price = \$2.50 Variable Cost = \$1.00 Current Quantity = 100 pops / day King of Pops considers a \$0.50 price CUT. The new price will be \$2.50 – \$0.50 = \$2.00. The new contribution margin will be \$2.00 - \$1.00 = \$1.00. The change in CM is equal to the change in price, \$0.50. So we plug the change in CM and NEW CM into our formula: %Profit BE P = - change CM / New CM = - (-\$0.50) / \$1.00 = + 50% This result says that the price cut will improve profitability for King of Pops if Quantity increases by at least 50%. King of Pops considers a ;price increase of \$0.50. Their NEW Price will be \$2.50 + \$0.50 = \$3.00, and their NEW CM will be \$3.00 - \$1.00 = \$2.00. Their change in CM will be equal to the price change, +\$0.50. Use the formula again:

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