Healthy Spring Water Company

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HEALTHY SPRING WATER COMPANY

PROBLEM 1a

DEFINING THE PRICE-VOLUME TRADEOFF
FOR A 20% PRICE INCREASE

The Health Spring Water Company sells bottled water for offices and homes. The price of the water is $20 per 10 gallon bottle and the company currently sells 2,000 bottles per day. Following is a summary of the company’s income and costs on a daily basis.

Sales Revenue $40,000 Incremental Variable Costs $16,000 Nonincremental Fixed Costs $20,000

Note: You can assume that variable costs are constant so that the average of them is the variable cost relevant for a change in sales.

One can calculate the change in sales volume necessary for the price change to be profitable by using the following Basic Breakeven
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The percentage Breakeven Sales Change can be calculated simply by dividing the unit sales change by the initial sales level, or may be calculated more directly with the following expression:

% BE Sales Change = % BE Sales Change + $ Change in Fixed Costs (with Incremental FC) New $ CM x Initial Sales

Healthy Springs Continued:

4. To reposition its water as a premium product, Healthy Spring will require an increase in its advertising and promotion budget of $900 daily. What is the maximum sales loss that Healthy Spring could tolerate before a 20% price increase would fail to increase its net profit? (That is, what is the breakeven sales change, including the incremental fixed cost of the advertising campaign?)

HEALTHY SPRING WATER COMPANY

PROBLEM 2

FACING NEW COMPETITION

Over the past decade, the Healthy Spring Water Company’s sales grew rapidly due to increasing concerns about water quality. In recent years, however, the company’s sales have been stagnant. The problem is that the market for spring water grew large enough that grocery stores began to carry it, at prices somewhat below those of Healthy Spring. Consequently, the grocery stores are enjoying most of the benefit of continued growth in this market.

The management of Healthy Spring is considering whether a 10% price cut might be justified to renew its competitiveness in this
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