Question 15

Increased risk of customers seeking substitutes

Raising the selling price of a product can lead to a higher risk of customers looking for alternative options, as consumers may perceive the product as less valuable compared to competing products at lower prices.

A) Increased risk of customers seeking substitutes

This option is correct because increasing the price of a product often makes it less attractive to consumers, who may then consider substitutes. When prices rise, especially in competitive markets, customers are more likely to explore alternatives that offer better value for their money.

B) Increased breakeven point in units

This option is incorrect. While a higher selling price can potentially lower the number of units needed to break even, it does not inherently increase the breakeven point in units. The breakeven point is calculated based on fixed costs and contribution margin, and an increase in price typically reduces the number of units required to cover costs.

C) Increased fixed cost per unit

This option is incorrect. Fixed costs do not change with the price of the product. Instead, fixed costs are constant regardless of production levels, so increasing the selling price has no effect on the fixed cost per unit.

D) Decreased contribution margin per unit

This option is incorrect. An increase in the selling price typically increases the contribution margin per unit, assuming variable costs remain constant. A higher contribution margin indicates that the company retains more revenue per unit sold, not less.

Conclusion

The correct answer is A, as raising the selling price can lead to a heightened risk of customers searching for substitute products, thus affecting overall sales volume. Conversely, all other options either misinterpret the implications of price increases or incorrectly relate to fixed costs and contribution margins, demonstrating a misunderstanding of fundamental pricing strategies in business.