Put both levers on a comparable contribution basis
| Input or boundary | Unit and source | Decision use |
|---|---|---|
| Baseline price | CU per unit; current price record | Starting revenue per unit. |
| Baseline variable cost | CU per unit on the same scope; cost record | Starting cost that changes with each unit. |
| Baseline volume | Units per declared period; sales record or explicit scenario | Scales the direct contribution bridge. |
| Price-case volume | Units per the same period; labelled sensitivity | Prevents an unchanged-volume shortcut from becoming a demand forecast. |
| Cost-change side effects | Implementation CU, quality, capacity and timing; separate records or assumptions | Tests whether the saving is achievable without moving cost or harm elsewhere. |
period contribution = (price per unit - variable cost per unit) × units; lever effect = revised period contribution - baseline period contribution
- price per unit
- Entered customer price on the declared basis (CU/unit) — business record or user scenario
- variable cost per unit
- Cost that changes with the unit inside the same scope (CU/unit) — business record or user scenario
- units
- Baseline or sensitivity volume for one declared period (units/period) — business record or labelled assumption
A fixed-period cost reduction changes a different profit layer and must not be inserted as if it were a per-unit variable-cost saving.
Worked example: make the direct bridges equal, then add downside
The baseline is CU100 price, CU60 unit variable cost and 1,000 units per period. The CU5 changes and 920-unit downside are fictional.
| Step | Inputs and arithmetic | Result and interpretation |
|---|---|---|
| 1. Baseline contribution | (CU100 - CU60) × 1,000 | CU40,000 per period. |
| 2. Price rise at unchanged volume | (CU105 - CU60) × 1,000 | CU45,000: a CU5,000 direct increase before demand or implementation effects. |
| 3. Unit-cost reduction at unchanged volume | (CU100 - CU55) × 1,000 | CU45,000: the same CU5,000 direct increase before implementation or quality effects. |
| 4. Price downside | (CU105 - CU60) × 920 | CU41,400: CU1,400 above baseline, using an entered 8% volume decline rather than a forecast. |
| 5. Compare the evidence | Price case: volume sensitivity. Cost case: achievable saving, implementation, quality and capacity records. | Do not choose until each lever has evidence for its distinct downside. |
Test what would change the decision
| Case | Recalculation or evidence | Decision consequence |
|---|---|---|
| Price-case break-even volume | CU40,000 ÷ (CU105 - CU60) = 888.89 units. | Below this entered-volume threshold, the price case no longer preserves baseline contribution. |
| Cost saving requires CU4,000 implementation cost | First-period net bridge = CU5,000 - CU4,000 = CU1,000. | Compare the correct horizon and cash timing rather than claiming the full recurring saving immediately. |
| Saving reduces capacity or quality | Quantify rework, lost output or service impact separately. | Stop when a material side effect cannot be measured or bounded. |
| Fixed cost falls by CU5,000 per period | Treat it as a separate period-profit bridge, not CU5 per unit unless the allocation is explicitly required. | Keep cost classification and denominator honest. |
Compare the levers without forcing a winner
Use this sequence
- Reconcile baseline price, unit variable cost, units, period and indirect-tax basis. (not complete)
- Choose comparable currency changes and calculate each constant-volume bridge. (not complete)
- Add a volume sensitivity to the price case without calling it a forecast. (not complete)
- Add implementation, quality, capacity, supplier and timing effects to the cost case. (not complete)
- Compare the same horizon, cash basis and contribution boundary. (not complete)
- Choose a bounded action, owner and review trigger, or delay when evidence is not comparable. (not complete)
Mistakes that invalidate the comparison
- Claiming pricing is always more powerful while silently holding demand constant.
- Counting a fixed-cost saving as a per-unit variable-cost reduction.
- Ignoring implementation cash, rework, quality, capacity or supplier risk.
- Comparing a one-period price case with a multi-year cost saving.
- Treating required volume or an assumed saving as an observed result.
Use the registered calculation owner
- Price Increase Profit Impact Planner
Test a price increase
- Contribution Margin Planner
Measure contribution
- Supplier Cost Increase Impact Planner
Respond to a supplier cost increase
Questions and limitations
- Is one currency unit of price always equal to one currency unit of cost saving?
- Only as a direct per-unit contribution bridge when volume and every other input are unchanged. Their demand, quality, capacity, timing and implementation effects differ.
- Can a fixed-cost cut be compared in the same formula?
- Compare it at the period-profit layer. Do not divide it into a unit saving unless that allocation is explicitly needed and documented.
- Does the 920-unit scenario predict an 8% sales decline?
- No. It is a user-entered sensitivity case used to show how the decision changes.
Sources and evidence scope
- Choose a pricing strategy — business.gov.au: Primary small-business guidance for reconciling cost, goals, market evidence, customer value and capacity. It supplies no universal margin, package mix, discount band or demand response.
- Break-even point — U.S. Small Business Administration: Primary government explanation of selling price, variable cost, contribution and break-even relationships. It does not forecast demand.