Question

A retailer puts items on sale, how do you think this will impact their overall profit? Provide an example of CVP analysis you learned this week and do the "what if" they sold more items at a lower price due to the sale? Do you think your analysis will be the same for online and brick and mortar retailers? Why or why not?

Answer 1

Suppose the retailer is selling his products without discount at $200.
The cost is as follows:
Fixed cost	$50,000
Variable cost per unit	$60
Total cost	$50,060
But at this price the retailer can sell only 100 units
So his income statement will be as follows:
Sales	$20,000
Less:Variable cost	$6,000
Less: fixed cost	$50,000
Profit/Loss	($36,000)
Now, he starts putting up sale and sells product at 30%discount
So the Sell price is 200 less 30% that is 140
At this price he can sell further 200 units
new Income Statement
Total sales	(100*200)+(200*140)	$48,000
Less:Variable cost	(200*60)	$18,000
Less: fixed cost		$50,000
Profit/Loss		($20,000)
As we can see from both the examples, selling products at discount/sale is reducing the losses for the retailer since he is able to recover more cost by an increase in quantity sold
For every product sold above the first 100 units, he will get contribution of 140 less 60 that is 80 per unit. This will help him recover fixed costs
If the discounted price is above the variable costs per unit, it will always lead to increase in profits / reduction of losses
Yes the analysis will be the same for online as well as brick and motor costs, only the cost components may vary. Since both have fixed and variable costs.