Assuming a contribution margin of 25 percent and sales of $4 billion, with a 20 percent price increase, by how much can sales decrease before profitability (total contribution) drops below its current level? Refer to Financial Analysis of Marketing Tactics: Price Decrease in Appendix 2: Marketing by the Numbers to learn how to perform this analysis but determine the maximum drop in sales before total contribution is negatively affected.

For the past several years, large food manufacturers followed Kraft-Heinz’s lead by aggressively slashing costs to improve profitability. That hasn’t work out well for Kraft-Heinz, or for other manufacturers such as General Mills, marketer of Yoplait yogurt, Cheerios and other breakfast cereals, Häagen-Dazs ice cream, and dozens of other popular brands. Such cost cutting has hurt the quality of well-known brands. In response, General Mills took a different tack, raising prices 20 percent. Some may argue that this has not worked out well for General Mills, either, noting that sales volume slipped in the first quarter following the price hikes. Although General Mills’ sales decreased, however, the company’s margins improved, making it more profitable. Companies realize that sales volumes will decrease after price hikes, but they also know that they can maintain or even enhance profitability even though sales drop.