Pricing Strategy Marketing Incremental Break Even Analysis Complements Substitutes Pricing Q34929411
Pricing Strategy – Marketing
Incremental Break Even Analysis, Complements & Substitutes,Pricing and Distribution
KDrink Assignment
The KDrink Company sells bottled water for offices and homes. Theprice of the water is $20
per 10 gallon bottle and the company currently sells 2000 bottlesper day. Following are the
company’s income and costs on a daily basis:
Sales Revenue $40,000
Variable Cost $16,000
Fixed Cost $20,000
[Note: You can assume that variable costs are constant so that theaverage of them is also the
unit variable cost.]
The company is enjoying stable demand with its current pricing, butmanagement is looking
for ways to increase profitability. One suggestion is that thecompany reposition its water as a
premium product, justifying a higher price. If successful, thecompany believes that it could
charge 20% more for its water than it does now.
1. What is the maximum sales loss (in % and units) that KDrinkcould tolerate before a
20% price increase would fail to make a positive contribution toits profitability (i.e.,
what is the basic break-even sales change)?
2. By how much would KDrink’s contribution increase/decrease if itssales declined by
15% following the price increase?
3. In order for KDrink to reposition as a premium water, managementbelieves that it
will have to upgrade the packaging of its product. The company willdeliver the water
in glass rather than plastic bottles and the bottles will be“safety sealed” to insure
their cleanliness until the covering is removed in the customer’shome. These changes
will add $1.00 per bottle to the variable cost. What is the maximumsales loss KDrink
could have for the 20% price increase to remain profitable?
4. To reposition its water as a premium product, KDrink willrequire an increase in its
advertising and promotion budget of $900 daily (in addition to theincrease in
variable cost mentioned above). What is the maximum sales lossKDrink could
tolerate before a 20% price increase would fail to increase its netprofit?
5. In addition to the bottled water, KDrink offers flavored drinkpowders to mix into the
water. Each powder pack sells for $5 and has a variable cost of $1.If 10% of
KDrink’s customers buy one pack per bottle of water they buy, whatis the maximum
sales loss QDrink could tolerate before a 20% price increase wouldfail to increase its
net profit (still including the change in variable cost and theadded advertising
expenditure)?
6. KDrink’s management considers producing the bottles they usethemselves instead of
buying them from a supplier. This would reduce the variable cost(not paying the
supplier), but in turn increase the fixed cost (additionalmachinery to produce the
bottles).
Would this change make KDrink more or less likely to pursue theidea of the
premium water? Please explain your answer.
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