Having decided not to advertise, Emma is contemplating whether to reduce the selling price to $175. At this price, she thinks she will sell 50 units. At this quantity, the test-prep package company that supplies GMAT Success will sell the packages to Emma for $115 per unit instead of $120. Should Emma reduce the selling price?
Contribution margin from lowering price to 175 dollars (175 dollars minus 115 dollars) per unit times 50 units: 3,000 dollars
Contribution margin from maintaining price at 200 dollars: (200 dollars minus 120 dollars) per unit times 40 units: 3,200 dollars
Change in contribution margin from lowering price: negative 200 dollars
Decreasing the price will reduce contribution margin by $200 and, because the fixed costs of $2,000 will not change, will also reduce Emma’s operating income by $200. Emma should not reduce the selling price.