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FINAL: HEALTHY SPRING WATER COMPANY DEFINING THE PRICE-VOLUME TRADEOFF FOR A PRICE INCREASE

FINAL: HEALTHY SPRING WATER COMPANY DEFINING THE PRICE-VOLUME TRADEOFF FOR A PRICE INCREASE.

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FINAL: HEALTHY SPRING WATER COMPANY DEFINING THE PRICE-VOLUME TRADEOFF FOR A PRICE INCREASE

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  1. FINAL: HEALTHY SPRING WATER COMPANYDEFINING THE PRICE-VOLUME TRADEOFF FOR A PRICE INCREASE • 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? • - %DP Sales D % • %CM’ + %DP B/E Sales Volume -10%/(60%+10%) = -10%/70% = -14.3% ~ 1714-1720 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? - $DCM Sales D % New $CM B/E Sales Volume -1/13 = -7.7% ~ 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? - $DCM + $D in FC Sales D % New $CM NEW $CM × initial unit sales B/E Sales Volume -4.2% ~ 1915 -1/13 + 900/(13*2000) = -4.2%

  2. Profit Implications of Competitive (Re)Actions Healthy’s Profit if Competitor Matches Price Change (Use Primary Elasticity ≈ -1) Healthy’s Profit if Competitor Does Not Match Price Change (Increase Elasticity ≈ -2) Cheapie’s Profit if Cheapie maintains/increases price (Healthy’s Increase Elasticity ≈ -2) Cheapie’s Profit if Cheapie decreases price (Healthy’s Increase Elasticity ≈ -2; Cheapie’s Decrease Elasticity ≈ -3)

  3. 6. Construct a payoff matrix that summarizes unit volumes and profit for Cheapie with prices at $18 and $20 and for Healthy with prices at $20 and $22. What are the take-aways? Exhibit 1: Payoff Matrix under Different Pricing Scenarios1 Strictly according to the payoff matrix…

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