Pricing Strategy - Marketing
Incremental Break Even Analysis, Complements &
Substitutes, Pricing and Distribution
KDrink Assignment
The KDrink Company sells bottled water for offices and homes.
The price of the water is $20
per 10 gallon bottle and the company currently sells 2000
bottles per 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
the average of them is also the
unit variable cost.]
The company is enjoying stable demand with its current
pricing, but management is looking
for ways to increase profitability. One suggestion is that the
company reposition its water as a
premium product, justifying a higher price. If successful, the
company 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 KDrink
could tolerate before a
20% price increase would fail to make a positive contribution
to its profitability (i.e.,
what is the basic break-even sales change)?
2. By how much would KDrink’s contribution increase/decrease
if its sales declined by
15% following the price increase?
3. In order for KDrink to reposition as a premium water,
management believes that it
will have to upgrade the packaging of its product. The company
will deliver 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’s home. These changes
will add $1.00 per bottle to the variable cost. What is the
maximum sales loss KDrink
could have for the 20% price increase to remain
profitable?
4. To reposition its water as a premium product, KDrink will
require an increase in its
advertising and promotion budget of $900 daily (in addition to
the increase in
variable cost mentioned above). What is the maximum sales loss
KDrink could
tolerate before a 20% price increase would fail to increase
its net profit?
5. In addition to the bottled water, KDrink offers flavored
drink powders 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,
what is the maximum
sales loss QDrink could tolerate before a 20% price increase
would fail to increase its
net profit (still including the change in variable cost and
the added advertising
expenditure)?
6. KDrink’s management considers producing the bottles they
use themselves instead of
buying them from a supplier. This would reduce the variable
cost (not paying the
supplier), but in turn increase the fixed cost (additional
machinery to produce the
bottles).
Would this change make KDrink more or less likely to pursue
the idea of the
premium water? Please explain your answer.