Healthy Water Spring

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 fixed cost because of the need to add more trucks - how much sales gain in necessary to make it...