Bob, the appliance retailer, recently saw an ad for a competitor appliance store. The competitor was offering to sell a refrigerator for substantially less than Bob’s price. Bob wondered, “We are selling identical refrigerators. How can they sell them for so much less and still make a profit?”
Assume Bob’s Appliances sells only refrigerators (a simplifying assumption). We have the information shown in Table 12.1, Impact of Changing Volume.
To answer Bob’s question, there are three changes that would allow a lower selling price:
1.As shown in Table 12.1, selling a larger volume of units would spread the fixed costs over more units and reduce the fixed cost per unit.
2.Total fixed costs could be reduced, ...