Healthy Spring Water

In: Business and Management

Submitted By eladnev0
Words 1466
Pages 6
Healthy Spring Water Firm

Basic data (baseline):
P = 20
Q = 2000
Sales revenue = 40000
Variable cost = 16000
Fixed cost = 20000

From the given data, we can conclude that the variable cost per bottle is 8.
Variable cost per bottle = Total variable cost / number of bottles = 16000 / 20000 = 8.
From the given data, we can also calculate the firm's current profit:
Π = R – C = PQ – ( VQ + FC ) = 20*2000 – ( 8*2000 + 20000) = 4000

Question 1:
The firm raises the price to 24 (which is a 20% increase) but there is no change in fixed cost - how much sales loss is tolerable?
Relative Sales Change=-Price ChangeOriginal Contribution Margin+Price Change
Relative Sales Change=-24-2020-8+24-20=-412+4=-416=-0.25
Iso-Contribution Sales Quantity Change=-0.25*2000=-500

A calculation check can be done using the managerial income statement: Managerial Income Statement | | | New Situation | Revenues | | 24 * 1500 = | | 36000 | Total variable costs | | 8 * 1500 = | | (12000) | Total Contribution | | (24 - 8) * 1500 = | | 24000 | Total fixed costs | | 20000 = | | (20000) | Profit | | 24000 – 20000 = | | 4000 |

Changes Table:

Price change (in %) | Updated Price | Required # of Bottles | 0.5 | 30 | 1091 | 0.4 | 28 | 1200 | 0.3 | 26 | 1333 | 0.2 | 24 | 1500 | 0.1 | 22 | 1714 | 0 | 20 | 2000 | -0.1 | 18 | 2400 | -0.2 | 16 | 3000 | -0.3 | 14 | 4000 | -0.4 | 12 | 6000 | -0.5 | 10 | 12000 |

Changes Graph (Iso-Contribution Curve):

Question 2:
An assumption was made that the baseline fixed costs in the amount of 20000 do not include the cost of 5 trucks (2500) required to deliver the 2000 bottles.

The firm considers lowering the price to 18 (which is a 10% price cut) but there would be a change in the…...

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