Obesity in South Africa is on the increase, with around 60% of the population being overweight or obese. Overweight or obese people are prone to the following conditions: high cholesterol, high blood pressure, strokes, heart disease, asthma, depression and sleep disorders. Obesity is becoming a health care problem, since it increases health care costs.
There has been a drive by retailers in collaboration with the South African Medical Schemes, as well as the Department of Health to change people’s eating habits, by making certain healthy products more affordable to the general public.
Bread is the main food that is consumed by most people. A retailer is considering reducing the price on its low GI (glycaemic index) bread. Low GI bread is very good for overweight or obese people since it keeps the body’s blood sugar levels in check; it releases energy slowly, which keeps you fuller for longer; it’s high in fibre; and contains good fats. The average selling price of a loaf of low GI bread is R12.50 and the variable cost per loaf is around R5. The retailer would like to explore three different price reduction strategies, for the next period:
· Strategy 1 Reduce the selling price of the bread by 3% – this would increase the sales volume by 6%.
· Strategy 2 Reduce the selling price of the bread by 6% – this would increase the sales volume by 10%.
· Strategy 3 Reduce the selling price of the bread by 9% – this would increase the sales volume by 15%.
Fixed costs amount R87 500 for the next period. Irrespective of the strategy chosen, the retailer wants to maintain the current net profit of R325 000 for the next period.
Evaluate each of the alternative price reduction strategies, indicating the most profitable one. (Assume the same cost structure as the current year.)
Highlight other factors that should be considered before adopting a price reduction strategy.