5.5.3—Effects of price and cost changes

Changing price, variable cost or fixed cost changes contribution, break-even and profit; the direction is mechanical but the sales response may not be.

A price cut lowers contribution per unit but may raise volume; a fixed-cost rise shifts break-even without changing unit contribution.

Recalculate contribution and break-even, then test whether the assumed volume response is credible.

Price falls from $10 to$9 while variable cost stays $6: contribution falls from$4 to $3, so break-even rises unless volume grows enough.

Do not infer higher profit from higher sales without recalculating contribution.

Show each change graphically and quantitatively while holding other factors constant. A higher selling price steepens the total-revenue line, raises contribution, lowers break-even output and increases profit and margin of safety at a stated sales volume; a lower price does the reverse unless extra demand compensates. A higher variable cost steepens the total-cost line, lowers contribution and raises break-even; a higher fixed cost shifts the total-cost line upward in parallel and also raises break-even. Example: with fixed costs of $12,000, price$10 and variable cost $6, break-even is$12,000 ÷ $4 = 3,000 units. If variable cost rises to$7, contribution falls to $3 and break-even rises to 4,000 units; forecast sales of 5,000 then have a 1,000-unit rather than 2,000-unit margin of safety.