Introduction
The business’s profit depends on the decisions made by the management that influence the workflow and the pricing policy. It is especially urgent for businesses connected with selling products, including candy and snack stores. In this regard, one needs to make the right decisions in terms of sales and prices in order to maintain the cost and earnings balance. In this case, the business will be profitable, and there will be opportunities for development. Moreover, it is necessary to remember that raising the price does not always guarantee a profit since, in some cases, it can lead to a drop in sales and losses. The purpose of the work is to analyze how some decisions in terms of price policy affect the profitability of a business and the break-even point.
Price Policy and Business Profitability
The break-even point is an important factor in business since its indicators formulate the profit or loss of the enterprise. It is the indicator at which the company does not receive losses or income, taking into account costs and profits, and each subsequent unit of the product will bring profit (Mehta, 2021). One needs to conduct monitoring for this index since, in case of its increase or decrease, it is necessary to take certain measures. Thus, in some cases, these measures can be formulated by raising or lowering the price of certain goods. The choice of strategy should depend on the popularity of this product, that is, on its sales performance.
Thereby, if the product sales mix remains unchanged, the price reduction on Bison Bites will have negative consequences. It is because even though the profit-to-cost ratio will be profitable for the business, the net profit will fall. It formulates the importance of the aspect of changing the product sales mix, namely the percentage of sales of certain goods. In this case, the less expensive item was lower in price, and the number of sales did not change. Thus, total profits will be lower than they were before the price cut.
However, if the sales mix indicators change, the dynamics will be positive. Given that Bison’s marketability has increased by up to 10%, it formulates raising if the items sold. Accordingly, both the sales profit indicator and the net profit indicator increase, taking into account all production costs and the cost of goods. Thus, one may notice that the decrease in price led to an increase in net profit and a positive effect on the break-even point of the Salty Pawz.
It is worth noting that the break-even point should not be confused with the point of occupancy. The break-even point may be expressed in units of the profit, taking into account the expected profit, or in monetary terms. The payback point is determined by the time since it is the time period required for the income to equal and exceed the costs. In other words, one can calculate how long the payback period is needed to reach the break-even point and, in the aftermath, profit. In addition, the break-even point in units of production is the minimum indicator of the quality of production, which is necessary in order for the income from its sale to cover the costs of production.
In this case, the impact of price reduction on the break-even point for Salty Pawz is determined by the number of products sold. Moreover, it is necessary to take into account the total quantity and not the specific value for certain products. The main purpose of lowering the price of a given unit of goods is to increase its marketability through a profitable offer. In such a case, one may notice that by increasing the quantity of production, one will cover the costs of production and reach the break-even point. In the event that growth continues, one will make a profit from the resources that are left after covering the costs of production.
The time period required to implement a positive scenario is the payback point. It depends on many factors such as the cost of resources, rent, salaries, electricity, phone, internet, website, advertising, water and sewer, and other necessary factors. The payback point is the moment when the profit received not only compensates for all the above costs but also exceeds these values. In addition, it is also necessary to take into account such financial factors as taxes and various fees that may be provided depending on the business. In the current case, one must take into account the cost of maintaining a small shop and a production chain. That is, it will also include salaries and the price of consumables.
Conclusion
To conclude, for the successful maintenance and development of a business, one needs to make the right decisions that will formulate the allocation of resources. Decreasing or raising prices should depend on a number of factors, among which it is worth highlighting the popularity of the product and its cost. As one might note, in the Salty Pawz case, in a scenario in which the sales mix product does not change, lowering the price is not the best option. However, taking into account the changed product mix sales and the increase in the rate of products sold, the price reduction will have a positive impact on Salty Pawz’s break-even point.
Reference
Mehta, B. K. (2020). Cost and management accounting. SBPD Publications.
