Swing vs Steady
Total Break-even sales=5000+2500= 7500 Change in Profit for 40% increase in sales= (Sales change in units- Break-even sales change) * New contribution Margin =(2000-2500)*3 =-750*6 =- $1500 The answers differ from the answers in part a because in part a segmentation pricing is used whereas here the price is reduced for the entire product line. The change in the contribution margin for all the products is responsible for the change in profitability. c) Swing is better positioned to take advantage of this opportunity because with a 40% increase in sales at a price of$ 8. per unit, it incurs additional profits of $4500; whereas Steady incurs losses of $1500. If the companies share the market both the companies will have additional sales lower than the break-even sales resulting income lower than their current income. In such a case Steady will suffer far more losses. Low variable costs and hence lower contribution margins of Swing make the company more profitable in comparison to Steady for the sales of additional units. Since the market cannot be segmented, I would advise Swing to reduce its price and enter the market to acquire 40% additional sales.
Steady should overlook the new market and continue selling to the current market without changing its price. d) Break-even sales change that would change the profits by the same amount as a reduction in price. Initial Contribution Margin= 10-5. 5=4. 5 Reactive breakeven =? P/Initial CM =-1. 5/4. 5=- 33. 33% Thus a sales reduction of 33. 33% percent at an initial price of $10 is equivalent to losses brought about by a price reduction of 1. 5. Steady’s management believes that a price of $10 after Swings reduction to $8. 5 would have brought about a 60% reduction in Steady’s sales. Since 33. 33%