📈 Impact of Cost Changes
When costs change, it directly affects a business''s profitability — even if revenue stays the same.
If costs increase
- Profit margins shrink (or the business makes a loss)
- The business may need to raise prices → could lose customers
- May need to find ways to cut costs elsewhere
- Break-even point increases — more sales needed to cover costs
If costs decrease
- Profit margins improve
- Business can lower prices to attract more customers
- OR keep prices the same and enjoy higher profits
- Break-even point decreases — fewer sales needed
Example: A bakery''s flour costs rise by 20%. If it sells bread at the same price, gross profit falls. It must either absorb the cost, raise prices, or find a cheaper supplier.
💲 Impact of Price Changes
Changing the selling price affects both revenue and demand, which together determine profitability.
If prices increase
- Revenue per unit rises → potentially higher profit per unit
- But demand may fall → fewer units sold
- Total revenue could go UP or DOWN depending on how much demand drops
- Works best for products with inelastic demand (essentials, luxury brands)
If prices decrease
- Revenue per unit falls → lower profit per unit
- But demand may rise → more units sold
- Total revenue could go UP or DOWN depending on demand increase
- Works best for price-sensitive (elastic) products
The impact of a price change depends on price elasticity of demand — how sensitive customers are to price changes. You''ll study this in more detail in Unit 4! 📊
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⚖️ Combined Effects on Break-Even
Changes in costs or prices directly shift the break-even point — the number of units that must be sold before the business starts making profit.
- Costs rise + price stays the same → break-even point INCREASES (need to sell more)
- Costs fall + price stays the same → break-even point DECREASES (need to sell fewer)
- Price rises + costs stay the same → break-even point DECREASES
- Price falls + costs stay the same → break-even point INCREASES
Break-even = Fixed costs ÷ (Price − Variable cost per unit). Any change to price or variable cost changes the denominator and shifts the break-even point! 🎯