Chapter 9: Financial Analysis
Healthy Spring Water Company
Defining the Price–Volume Trade-Off 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 2,000 bottles per day.
Following is the company’s income and costs on a daily basis.
Sales revenue $40,000
[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.
(That is, what is the basic breakeven sales change?)
b) By how much would Healthy Spring’s contribution increase if its sales declined by 15%
following the price increase?
d) To reposition its water as a premium product, Healthy Spring will require an increase in
its advertising and promotion budget of $900 daily. What is the maximum sales loss that
Healthy Spring could tolerate before a 20% price increase would fail to increase its net
profit? (That is, what is the breakeven sales change including the incremental fixed cost
of the advertising campaign?)