This paper examines two pricing strategies available to the managers of Pringly Division for a new product launch. Using cost-volume-profit (CVP) analysis, the paper calculates the break-even point, units required to achieve a $4,000,000 profit target, and the margin of safety under each scenario: a $170 selling price with $20,000,000 in fixed costs, and a $200 selling price with $25,000,000 in fixed costs. The analysis concludes that the $170 price point offers the stronger probability of meeting the profit target. The paper also briefly introduces alternative assessment methods, including marginal costing, return on investment (ROI), and residual income (RI), as complements to break-even analysis.
The managers at Pringly Division need to make a decision regarding the pricing of a new product. Two strategies have been proposed: the first is to sell the product at $170 per unit, and the second is to increase marketing spend and raise the price. In both cases, the firm requires a profit of $4,000,000. In order to assess which strategy offers the best opportunity for Pringly Division, each pricing option is evaluated individually by calculating the number of units required to break even and the number of units that must be sold to realize the desired profit level.
If the product is sold at $170 per unit, total annual fixed costs will be $20,000,000. Knowing that the variable cost per unit is $30, it is possible to calculate the contribution per unit and then determine how many units must be sold to break even. This calculation is shown in Table 1 below.
Table 1: Break-even point at $170 selling price
Selling price per unit (a): $170 | Variable cost per unit (b): $30 | Contribution per unit (c) = (a − b): $140 | Fixed costs (d): $20,000,000 | Unit sales to break even (d/c): 142,857.14 → 142,858 units
This shows that 142,858 units is the break-even point (rounded up, since a fraction of a unit cannot be sold). Based on the sales probability data, this level of sales appears very comfortable, suggesting the firm is unlikely to make a loss on this product. However, the firm does not wish merely to break even — it also requires a profit. To determine the sales needed for the target profit, the required profit is added to fixed costs to calculate the total contribution needed, as shown in Table 2.
Table 2: Units required for $4,000,000 profit at $170 selling price
Selling price per unit (a): $170 | Variable cost per unit (b): $30 | Contribution per unit (c): $140 | Fixed costs (d): $20,000,000 | Required profit (e): $4,000,000 | Total contributions required (f) = (d + e): $24,000,000 | Unit sales required (f/c): 171,428.57 → 171,429 units
To achieve the desired profit level, the firm would need to sell 171,429 units. This target is less comfortable than the break-even figure, but given a probability of 0.5 that 180,000 units could be sold, the target is not unreasonable.
The margin of safety — defined as the difference between the upper expected sales level at the desired profit point and the break-even point — is presented in Table 3. It shows the level of sales (in both units and dollars) that the firm holds as a buffer above the desired profit level before losses would begin to occur.
Table 3: Margin of safety at $170 price point
Break-even point: 142,858 units / $24,795,860 revenue | Desired profit level: 171,429 units / $29,142,930 revenue | Margin of safety: 25,571 units / $4,347,070
With a $200 selling price per unit, annual fixed costs increase to $25,000,000. The same calculations are applied to assess the break-even point and the sales volume needed to reach the desired profit level.
Table 4: Break-even point at $200 selling price
Selling price per unit (a): $200 | Variable cost per unit (b): $30 | Contribution per unit (c): $170 | Fixed costs (d): $25,000,000 | Unit sales to break even (d/c): 147,058.82 → 147,059 units
This gives a break-even point of 147,059 units (rounded up to account for whole units). Next, the sales required to achieve the desired profit level are calculated in Table 5.
Table 5: Units required for $4,000,000 profit at $200 selling price
Selling price per unit (a): $200 | Variable cost per unit (b): $30 | Contribution per unit (c): $170 | Fixed costs (d): $25,000,000 | Required profit (e): $4,000,000 | Total contributions required (f): $29,000,000 | Unit sales required (f/c): 170,588.24 → 170,589 units
To achieve the desired profit level, the firm would need to sell 170,589 units at the $200 price point.
The margin of safety in units and revenue is shown in Table 6.
Table 6: Margin of safety at $200 price point
Break-even point: 147,059 units / $29,411,800 revenue | Desired profit level: 170,589 units / $34,117,800 revenue | Margin of safety: 23,530 units / $4,706,000
"Probability-based comparison favors $170 price point"
"ROI, residual income, and marginal costing discussed"
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