Swing vs Steady a)Swing: Sales: 5000 Price per unit: $10 Variable Cost per unit: $2. 5 Fixed Cost: $35000 Current Profit: $ 2500 New Price per additional unit: 0 New Contribution Margin = New Price per unit – Variable cost per unit =$8. 5-$2. 5 =$6 New Sales unit @40% additional sales= 5000*40%= 2000 Additional profit @40% additional Sales = Additional Sales* New Contribution Margin =2000*6 =$12000 New Sales unit @20% additional sales= 5000*20%= 1000 Additional profit @20% additional Sales = Additional Sales* New Contribution Margin =1000*6 =$6000 Steady: Sales: 5000 Price per unit: $10 Variable Cost per unit: $5. Fixed Cost: $35000 Current Profit: $ 2500 New Price per additional unit: $8. 5 New Contribution Margin = New Price per unit – Variable cost per unit =$8. 5-$5. 5 =$3 New Sales unit @40% additional sales= 5000*40%= 2000 Additional profit @40% additional Sales = Additional Sales* New Contribution Margin =2000*3 =$6000 New Sales unit @20% additional sales= 5000*20%= 1000 Additional profit @20% additional Sales = Additional Sales* New Contribution Margin =1000*3 =$3000 Both the companies should enter the market as they are realizing additional profits by charging a lower price for the new market. )Swing : ? P =-1. 5 CM= Price- Variable Cost= $10-$2. 5 =$7. 5 % Break-even sales change= -? P/(CM + ? P) = 1. 5/(7. 5-1. 5) = 25% % Break-even sales change in units =5000*25% =1250 Total Break-even sales=5000+1250= 6250 Change in Profit for 40% increase in sales= (Sales change in units- Break-even sales change) * New contribution Margin =(2000-1250)*6 =750*6 =$ 4500 Steady: ? P =-1. 5 CM= Price- Variable Cost= $10-$5. 5 =$4. 5 New CM= New Price – Variable Cost= 8. 5-5. 5= 3 % Break-even sales change= -? P/(CM + ? P) = 1. 5/(4. 5-1. 5) = 50% % Break-even sales change in units =5000*50% =2500
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 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 60% reduction in Steady’s sales. Since 33. 33%
