November 14, 2012
MKT 2100 – Case #5
HEALTHY SPRING WATER COMPANY
The Healthy Spring Water Company sells bottled water, priced at $20 per 10 gallon bottles, to homes and offices. On average, the company sells about 2000 units per day. With its current pricing, the demand for the water is stable, but management is always looking for new ways to shake things up and increase profits. The company has thought about repositioning their water as a premium product, which would increase the unit price; and in return increase profit. If this idea goes the way the company predicts, they could charge 20% more for its water.
1. What is the maximum sales loss (in % and units) that Healthy Spring could tolerate before a 20% price increase would fail to make a positive contribution to its profitability? (That is, what is the basic break-even sales change?)
Answer: 25% sales loss (1500 break-even sales ...view middle of the document...
These changes will add $1.00 per bottle to the variable cost of sales. What is the new break-even volume with the 20% price increase?
Answer: 20% sales loss (1600 break-even sales volume)
-3 divided by 15 = .20
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 break-even sale change including the incremental fixed cost of the advertising campaign?)
Answer: 17% sales loss (1660 break-even sales change)
(-3 divided by 15) + (900 divided by 15 * 2000) = -.20% + 9 divided by 300
I think repositioning its water as a premium product is a good idea. Anytime there is an opportunity to increase profits, in today’s market, is a plus. Healthy Spring Water Company already has the customer and community support that a business needs in order to be successful. Their pricing is reasonable and I think that a lot of businesses and individuals will continue to purchase its water, and new clients will start to come around as well. I could see myself as a customer, if I was in the market for water like that.
I believe increasing the advertisement budget is a must, and will pay for itself in the end. I would stay focused on current cliental, and continue to push them in the direction the company would like to go. If they have been customers of the company for a while, than they should be a reliable good source for advertisement. Meaning, they could refer people to the company and spread the word; and it wouldn’t cost Healthy Spring Water a dime. I think the company is on the right path, but I would have a back-up plan for a rainy day; if need be.