Blog & Resources

How do price and volume effect revenue and profit?


Many business owners will reduce their prices to increase volume and hopefully revenue and profit, however this does not necessarily lead to the results anticipated. 


Consider the following example:


You have a product that sells for $100 per unit.

The direct costs of selling this product is $50 per unit.

Your business overheads are $350,000 per annum.

You sell 10,000 units per annum.


Your profit and loss would look as follows:


Revenue                                             $1,000,000

Less: COGS                                         $500,000

Equals: Gross Profit                             $500,000


Less: Overheads                                  $350,000


Equals: Net Profit                                $150,000


You decide to reduce your prices by 10%.  This has the effect of increasing your volume by 20%.



Your profit and loss would look as follows:


Revenue                                           $1,080,000

Less: COGS                                        $600,000

Equals: Gross Profit                           $480,000


Less: Overheads                                $350,000


Equals: Net Profit                              $130,000


Despite selling 20% more products, this has only translated to slightly more revenue $80,000 (8% increase).  More importantly your net profit has decreased by $20,000.   For the business to maintain its original net profit, it would have to increase volume by 25%.  


If you would like to discuss further please contact us:
 McNamara & Company - Chartered Accountants, located minutes from the Melbourne CBD
 www.mcnamaraandcompany.com.au/contact-us
 Phone +61 3 9428 1062
 Email admin@mcnamaraandco.com

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