You could also use cost-volume-profit analysis to help determine the sales price of a new product. If you know your needed profit and the cost involved in making the product, using cost-volume-profit analysis will tell you how much you have to charge per item. It may turn out that the product will simply be too expensive compared to the competition, which is good to know long before you start making it.
Limitations of cost-volume-profit analysis
Although cost-volume-profit analysis can be helpful when you're trying to theorize and plan for a new product line or figure out how to make an existing one more profitable, it has a lot of limitations because of the assumptions that must be made to do the calculations.
For example, in cost-volume-profit analysis, you must assume that the costs of creating the product are consistent, meaning that materials, labor, and so forth will be the same price indefinitely, which is certainly not true in the real world. You can peg this a little high to compensate for rising costs, but it's difficult to really know the long-term costs.
Another assumption that makes the cost-volume-profit analysis much better in theory than practice is that all units are sold in the model. In this scenario, you must sell everything, always. And you must do so at the same fixed sales price across the run.
So, while cost-volume-profit analysis is useful for understanding how to price a product based on current market conditions, there are quite a few things to keep in mind when turning the cost-volume-profit analysis results into actionable steps.