FINAL HEALTHY SPRING WATER COMPANYDEFINING THE

Topics: Costs, Cost, Variable cost, Fixed cost, Total cost, Revenue / Pages: 8 (435 words) / Published: Jan 8th, 2015
FINAL: HEALTHY SPRING WATER COMPANY

DEFINING THE PRICE-VOLUME TRADEOFF FOR A PRICE INCREASE

1. What is the maximum % sales loss that Healthy Spring could tolerate before a 10% price increase would fail to make a positive contribution to its profitability? And what is the unit break-even sales volume?
- %P

-10%/(60%+10%)
Sales  %= -10%/70% = -14.3%
~ 1714-1720
B/E

%CM’ + %P
Sales Volume
2. Repositioning as a premium water will require upgrading the packaging, changing from plastic bottles to glass bottles that are "safety sealed" to insure cleanliness until the covering is removed in the customer's home. These changes will add \$1.00 per bottle to the variable cost of sales. What is the new breakeven volume with the 10% price increase?
- \$CM
Sales  % -1/13 = -7.7%
New \$CM
B/E Sales Volume
~ 1846
3. Repositioning the water as a premium product will require an advertising and promotion budget increase of \$900 daily. What is the maximum sales loss that Healthy Spring could tolerate before a 10% price increase would fail to increase net profit? That is, what is the break-even sales change including the incremental fixed cost of advertising?
-4.2%
- \$CM
+
\$ in FC
Sales  %
New \$CM
NEW \$CM × initial unit sales
B/E Sales Volume ~ 1915
-1/13 + 900/(13*2000) = -4.2%

Profit Implications of Competitive (Re)Actions
Healthy’s Profit if Competitor Matches Price Change (Use Primary Elasticity ≈ -1)
New
Expected Expected Exp Var Costs
Total
Expected
Price 
Price
Demand Revenue
(\$9 VC/U)
Fixed Costs
Profit
10%
\$22.00
2,070
\$45,540
\$18,630
\$20,900
\$6,010
\$46,000
\$20,700
\$20,900
\$4,400
0%
\$20.00
2,300
Healthy’s Profit if Competitor Does Not Match Price Change (Increase Elasticity ≈ -2)
New
Expected Expected Exp Var Costs
Total
Expected
Price 
Price
Demand Revenue
(\$9 VC/U)
Fixed Costs
Profit
1,840
10%
\$22.00
\$40,480
\$16,560
\$20,900
\$3,020
2,300
\$46,000
\$20,700
\$20,900
\$4,400
0%
\$20.00
Cheapie’s Profit if Cheapie maintains/increases price (Healthy’s Increase Elasticity ≈