Deacon Plumbing Supplies: Introduction of a Product to Increase Water Pressure

Deacon, a large manufacturer of plumbing supplies, wants to introduce a product that increases water pressure.  The target market is several hundred thousand businesses (e.g., restaurants) that have a problem with water pressure. In a study conducted by Deacon, 80% of business owners who tested the product said they “definitely would buy it” at some point in the future. With an end-user price of $500 (plus plumber’s fees), and a variable cost of $100, the product could be a major source of revenue (and profit)!  The price (to the end-user) of the competing solution (the “pipe solution”) was only $250, but it took up much more space and required much higher plumbers’ fees to install.  Thus, one benefit Deacon planned to communicate was that their total cost to the end-user (i.e., equipment plus plumber’s fees) was half that of the “pipe solution”.  This would be communicated through $1.25 million in magazine advertising to the appropriate parties (plumbers, business owners).

Deacon wants to sell the product through an exclusive arrangement with Muse Supply, a major plumbing supply house that serves commercial renovation contractors. In this industry, the distributor (Muse) receives a margin of 24% of its revenue on any product that it sells, and plumbers receive a margin of 10% of the end-user price of equipment and supplies they use. Muse expects a gross margin return of at least 400% (4.00) on any money it ties up in inventory.  Deacon expects that sales volume during the first year (through Muse) would be about 100 units per week, and average distributor inventory would be about 3 times this level.  If Muse declines the offer, Deacon will approach Serendipity Enterprises (the world’s largest distributor of plumbing products), Muse’s top competitor, to offer exclusive distribution.

1. How many units of the new product would Deacon have to sell in order to break even on the advertising expenditure that is planned?
2. How long will it take Deacon to break even?
3. In general, what are the benefits and limitations of knowing the breakeven point? To answer this question, your team can do any research within and outside of the material and reading in the course.

• Break Even: ‘Point’ at which the costs/expenses of producing a product equal the revenue made from selling the product.

Knowing the number of units necessary to break even is important in setting the price.

Valuable for evaluating profit goal and assessing riskiness of actions.

Can help make go/no go decisions.

• Break-Even Analysis identifies the unit volume or $ sales at which an organization neither makes a profit nor incurs a loss