Swing v. Steady
Swing Manufacturing and Steady Manufacturing both operate in the widget industry, but with radically different cost structures. Swing is a capital-intensive, automated manufacturer, while Steady is a labor- intensive "job-shop." Monthly operating data are as follows:
Swing Manufacturing Sales 5,000 units Price $10.00 Variable $2.50
Steady Manufacturing 5,000 units $10.00 $5.50 $20,000/month $9.50 $2,500/month
Fixed Cost Full Cost Current Profit
$35,000/month $9.50 $2,500/month
Swing and Steady both currently have equal (50%) shares of the market. Each is evaluating opportunities to enhance profits. One opportunity involves selling to a low-value, but potentially high- volume, market segment not currently served by either company. The potential increase in sales for either company entering that market alone would be at least 40% (2000 units). If they both entered, the potential sales increase would be at least 20% for each of them. Unfortunately, reaching that market would require pricing at $8.50, 15% below current levels.
(a) If either company could costlessly segment the market for pricing (that is, charge the 15% lower price only to this new segment without undermining the prices charged to current customers), how much additional profitability could each company earn by achieving a 20% and a 40% increase in sales? Would you recommend that either or both companies pursue this opportunity?
(b) In fact, neither Swing nor Steady can effectively segment this market (each must charge one price to everyone).
1. Calculate the break-even sales changes for this opportunity for each of them. 2. Calculate the changes in profit for a 40% increase in sales.
SCM580: Class Three Questions & Exercises
SCM580: Class Three Questions & Exercises
(c) Which competitor is better positioned to take advantage of this opportunity? Assuming that neither company can segment the market, what advice would you give to Swing and to Steady regarding this opportunity?
HEALTHY SPRING WATER COMPANY DEFINING THE PRICE-VOLUME TRADEOFF FOR A 20% PRICE INCREASE
The Healthy Spring Water 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 is the company's income and costs on a daily basis.
Sales revenue Incremental Variable cost Non-incremental Fixed cost
$40,000 $16,000 $20,000
[Note: you can assume that variable costs are constant so that the average of them is also the variable cost relevant for a change in sales.]
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 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?)
2. By how much would Healthy Spring's contribution increase if its sales declined by 15% following the price increase?
3. In order for Healthy Spring to reposition itself 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 of sales.