Paulsen Company

Answer

Paulsen Company Analysis

            Before deciding on whether or not to increase the prices of their products, companies must consider numerous factors. In most cases, they use cost-volume-profit analysis or break even analysis to establish how changes in their selling prices and costs will affect the volume of their profit within the short run. Cafferky (2010) noted that a careful and accurate break even analysis require companies to have knowledge about their costs, as well as, variable and fixed behaviors that changes with changes in profit volume. Therefore, this paper outlines cost-volume relationships that Paulsen Company should consider before increasing its selling price. It also describes non-monetary factors that the organization must consider before increasing the selling price.

Cost-Volume Relationships That Paulsen Company Should Consider

             Paulsen Company should be alive to the fact that raising the selling price of each unit will not influence its monthly fixed costs and variable costs per unit. Regardless of an increase or decrease in sales volume, fixed costs of operating and maintaining the business will not change. Fixed costs are expenses that do not relate with the products sold (Williams, 2016). Paulsen Company should understand that although fixed costs will not affect the products sold, they will make the contribution margin to rise from $35 to $38.50. While it is not unclear whether this revenue will constitute the product and monthly fixed costs, Paulsen Company should consider the precise place the revenue will place it in terms of performance. In case it does not record any profit, Paulsen Company should increase its selling price to a level that can make it break-even but does not make it incur any loss or gain any profit. Undoubtedly, any amount that is relatively below the cost of the product is ultimately regarded as a loss, and will consequently result in business collapse or failures.

Non-Monetary Factors to Consider Before Increasing a Selling Price

             Some of the non-monetary factors that Paulsen Company should consider before increasing its selling price include competition, customers’ response, the demand of the product, value, as well as, the financial condition of the economy. The company should conduct a research to understand how customers respond to changes in price because such changes are likely to influence the demand of its products. The company should also consider demographic factors such as the age of the targeted customers and where such clients are located, particularly when the suggested selling price will change the company’s position in the market. Although increasing its selling price can make Paulsen Company earn more profit, it should understand that doing so can potentially decrease the demand of the product thus lowering its sales volume and profit margin. In addition to price, factors such as customers’ need influence the demand of a product in the market (Haron, 2016). Reportedly, customers’ desire to buy a particular product changes when such a product is either in low or high demand and this influences the amount of the product sold. Thus, Paulsen Company should establish the demand of the product in the market before increasing the selling price. For Paulsen Company to attract new customers and maintain loyal ones, its selling price should match that of its close competitors. Therefore, before increasing its selling price, it should consider the level of competition in the market by analyzing the prices offered by its close competitors. Haron (2016) posited that once customers notice that the same product of equal value is offered by other firms at a relatively lower price, they are unlikely to purchase the product from Paulsen Company. Paulsen Company should also consider the value of the product before deciding to increase its selling price. Even when its customers decide to remain loyal after it has raised its selling price, the customers would be less motivated to buy a product of a lower value.

            In conclusion, understanding market conditions and customers usually help companies to exploit market opportunities thereby maximizing profits. In light of that, Paulsen Company should understand the prevailing conditions in the market by conducting extensive market research before deciding on whether to increase its selling price or not.