Question

For a firm with a current contribution margin of 50 percent, plot the volume hurdle as price goes from a decrease of 40 percent to an increase of 40 percent. Are profits more sensitive to price increases or price decreases?

Answer 1

Yes, the profits are more sensitive to react similarly when the price increases or decreases. If the product has huge demand so the price increases based on the availability of supply. In that circumstances, the profit will generate. In some scenario, the price increased irrelevant to the demand float at that time the loss will fluctuate based on the availability of a product.

In the above whole instances, the price is the major sensitive factor acts to reflect whether profit or loss. As per the given information, the current contribution margin is 50%. The plot of volume price goes from decrease to 40% and again increased to 40%.

Actual contribution margin = 50%

Price decrease to 40% means actual contribution – price decrease in %

So it is 50% – 40% = 10%

Again the price increased to 40%

So the value of decreased to 10% + 40% increased price = 50%.

What we got 50% now is not considered to actual profit. Here we can observe the price acts as more sensitive to fluctuate of profit and loss. In this regard, we may come to conclusion as profit is more sensitive when the price increase or decrease.