Business Management

Activity 3.3.2
Breanna Erylle C. Liao

Break-Even Charts
The following data have been provided by the finance director of La Pitch which
manufactures high-quality tents for the specialist outdoor market. The marketing director
wants to reduce the price of the tents to $39.99 (he considers this to be a
psychologically attractive price to consumers) to increase sales volume but there are
concerns about reducing unit contribution and covering costs. There are also concerns
about exceeding La Pitch’s factory capacity.

● direct labour per unit $17

● direct materials per unit $18
● fixed costs $200 000
● current selling price $45
● maximum capacity of the factory is 30 000 units

20 marks, 40 minutes

1. Define the term “unit contribution.” [2]

Unit contribution is the amount each unit of production contributes to the

fixed costs and the profit of the business. It is calculated by subtracting
the direct costs from the selling price of a product.

2. On the basis of La Pitch’s financial information construct a fully labelled [8]

break-even chart. Calculate the break-even point, the margin of safety
and profit from the sale of 25 000 tents.
3. Examine advantages and disadvantages of the marketing director’s [10]
proposal to reduce the price of the tents to $39.99.

The marketing director’s proposal to reduce the price of the tents to $39.99 due
to the psychological attraction to the number, particularly .99, can be
considered and evaluated through the meaning behind it, the advantages and
disadvantages of the change. The “.99,” which is one of what people consider
as a “charm price,” allows the product to appear cheaper than they really are.
Since we, as consumers, tend to read from left to right, we are more likely to
register the first number and make an immediate conclusion as to whether the
price is reasonable. With this, rather than saying that the price is in the line of
40s, it is in the 30s, even if when rounded off, the price is $40. However, aside
from this factor that the marketing director shared, the impact of the price
change to the company and its finances must be considered.

If it is necessary for the selling price to change, it allows the business to

increase its number of supplies. By increasing the number of supplies, it must
be assured that the demand is quite high and could respond to the costs of the
supplies. It is possible for them to alter the quality of the product as well.
Reducing the price of the product itself should will cause the business to lower
their variable costs, pressuring a lower amount to be paid to suppliers. Since
the revenue and the cost have a positive relationship, decreasing the selling
price will need a smaller amount of supplies. This change could influence the
quality and the quantity of the product to be sold, depending on which
approach the business is after.

Given that the quality of the product remains, reducing the price could influence
a competitive advantage amongst other business in the same line of product. It
allows the business to have a wide audience, especially that one of the factors
to which a consumer purchases a particular product over the others is due to
its low price.

In the contrary, it must be noted that the total cost per product is calculated is
$41.67, which is with the following:
200 000 + (30 000 x [17 + 18]) = 1 250 000
1 250 000 / 30 000 ≅ 41.67

The current selling price, $45, will allow the business to still have a profit of
approximately $3.33 per product. However, changing the selling price to $39.99
will cause a loss of approximately $1.68. The change of return for the business,
from a gain to a loss, could be a justification why reducing the selling price
should not push through.

As the marketing director, he must be able to discuss the financial status of the
business with the head of finance to be able to consider the possible
advantage and shortcomings it could have after the price change. Even so,
from the details above, reducing the price could not be worth it.