Assignment:
Q: Conduct a break-even analysis. Based on your analysis, evaluate whether a 50% decrease in sales volume is likely or not? Would you accept the new package if you knew that even a 30% drop in sales volume were possible given the risks associated with the loss of goodwill in the distribution channels?
In the fall of 1978, Vince Roth, General Manager of the Clover Valley Dairy Company, was considering whether a newly developed multipack carrier for yogurt was ready for market testing and, if so, how it should be tested.
Since 1930, the Clover Valley Dairy Company had sold, under the trade name Valleyview, milk, ice cream, and other milk by-products-such as yogurt, cottage cheese, butter, skim milk, buttermilk, and cream-in Camden, New Jersey. The raw milk was obtained from independent farmers in the vicinity of Camden and was processed and packaged at the Clover Valley Dairy.
Clover Valley's sales had grown steadily from 1930 until 1973 to an annual level of $3.75 million. However, between 1973 and 1977, a series of milk price wars cut the company's sales to $3.6 million by 1977. During this time, a number of other independent dairies were forced to close. At the height of the price wars, milk prices fell to 75 cents per half-gallon. In the spring of 1977, an investigation of the milk market in Camden was conducted by the Federal Trade Commission and by Congress. Since then, prices had risen so that Clover Valley had a profit for the year to date.
Clover Valley served approximately 130 grocery store accounts, which were primarily members of a co-operative buying group or belonged to a 10-store chain that operated in the immediate area. Clover Valley no longer had any major chain accounts, although in the past they had sold to several. Because all three of the major chains operating in the area had developed exclusive supply arrangements with national or regional dairies, Clover Valley was limited to a 30 percent share of the Camden area dairy product market.
Although Clover Valley had a permit to sell its products in Philadelphia, a market six times the size of Camden, management decided not to enter that market and instead concentrated on strengthening their dealer relationships. In addition, it was felt that, if a price war were to ensue, it might extend from Philadelphia into the Camden area.
With the healthier market and profit situation in early 1978, Clover Valley began to look for ways to increase sales volume. One area that was attractive because of apparent rapid growth was yogurt. During the previous three years, management had felt that this product could help to reverse Clover Valley's downward sales trend, if given the correct marketing effort. However, the financial problems caused by the loss of the national grocery chains and the price war limited the firm's efforts. As a result, Mr Roth felt that Clover Valley had suffered a loss of share of yogurt sales in the stores they served.
Since 1975, Mr Roth had been experimenting with Clover Valley's yogurt packaging with the hope that a new package would boost sales quickly. All dairies in Clover Valley's area packaged yogurt in either 8-oz or 1-lb tubs made of waxed heavy paper. Clover's 8-oz tub was about 5 in. high and in. in top diameter, tapering to in. at base.
The first design change to be considered was the use of either aluminum or plastic lids on the traditional yogurt tubs. However, these were rejected because the increased costs did not seem to be justified by such a modest change. Changing just the lid would not make their tubs appear different from their competitor's tubs, it was felt.
By 1976, Mr Roth had introduced a completely different package for Clover Valley's yogurt. The 8-oz tubs were replaced by 6-oz cups, designed for individual servings. In addition, the new cups were made of plastic and had aluminum foil lids. The 1-lb tubs were unchanged. No special promotional effort was undertaken by Clover Valley, but unit sales of the new 6-oz cups were more than triple the unit sales of the old 8-oz tubs (see Exhibit 4.8). While the increased sales volume was welcomed, the new plastic cups increased unit packaging costs from 7.2 cents to 12.0 cents. This more than offset the saving of 4 cents because of the reduction in the amount of yogurt per container. Retail prices were reduced from 41 cents to 34 cents for the new 6-oz cup, while the price for the 1-lb tub remained at 75 cents. The increased sales then increased the total dollar contribution to fixed costs from yogurt by only 5 percent. (All dairies priced their yogurt to give retailers a 10 percent margin on the retail selling price. Competitor's retail prices for their 8-oz tubs remained at 41 cents.)