Toronto Chemicals Limited - Case Study Example

Case Study on Toronto Chemicals Limited Introduction Toronto Chemicals, Ltd. (TCL) is one of Canada’s leading providers of industrial cleaning supply products. In 1998, it began manufacturing the product ADD IT. ADD IT is a chemical additive used in water softening plants for commercial boiler feed water. The product was introduced to address one pressing industrial concern. This is the problem of treating boiler feed water. The boiler feed water is used to produce steam. In hard water areas, the problem is particularly serious because of the speed by which the sediment forms a tough scale on the inside of pipes and tanks. The sediments formed result to problems caused by impurities in the feed. These problems are scaling, formation of droplets, also referred to as foaming and Priming and carryover in the steam of volatile minerals. To resolve these problems, many companies install water-softening equipment in their boiler systems but this is simply a chemical process that removes hardening chemicals from the water before it is fed into the boiler. Toronto Chemicals, Ltd. is a wholly owned subsidiary of the American company Washington Lerke, Inc. (WLI). Washington Lerke, Inc.is a large chemicals and allied group with sales of over $3,000 million and total assets of over $2,100 million. It owns ten plants in the United States and has subsidiary firms in nine other countries, including Canada. The group is renowned for its excellent research and development facilities as well as its support of various university research programs. These have undoubtedly contributed to WLI’s growth over the years. Aided by its research, the group has widely diversified within the chemical industry. WLI’s largest foreign operation is in Canada, where Toronto Chemicals, Ltd. owns plants in Toronto and Montreal and reports a turnover of $240 million a year. Production in First Three Years The Chicago Chemical Company (CCC) developed a compound to be used with normal water softening chemicals in the 50’s. This innovative product serves as an additive. Its actions include to disperse the water softening compound as well as to prolong its life. At the same time, this product decreases the time and effort needed to regenerate the softener. This company had registered and able to get a patent for the product, named PURAFAX, both in the United States of America as well as Canada. Chicago Chemical Company is a small industrial company specializing in water-treatment additives. It does not, however, manufacture or sell water-softening chemicals. The considerable advertising for PURAFAX in trade and chemical journals indicate that it is a substantial part of CCC’s business. It sells for about $2 to $2.50 a pound. The rest of the company’s sales consist of a variety of small-volume products such as slime-control agents and fungi-control chemicals. Chicago Chemical Company’s final accounts for 1997 indicate sales of $22 million and assets of slightly over $120 million. Since 1990, the Washington Lerke, Inc. in the United States of America and the Toronto Chemicals, Ltd. in Montreal have been working on a compound that would be a match for PURAFAX. In 1995, just when the Chicago Chemical Company’s patent for PURAFAX expired, ADDIT was produced. The new product had three advantages over PURAFAX. First, the major chemical component of ADDIT is extractable from a widely available waste product. This gave TCL a considerable cost advantage over CCC who based their PURAFAX on a somewhat expensive chemical. Second, the formulation of ADDIT contained a powerful antirust constituent that virtually eliminated the rusting process within the water system. Company executives were especially pleased with this second aspect because it would give ADDIT a key advantage over PURAFAX which did not contain a rust-reducing agent. Third, ADDIT is produced and marketed as a liquid; making it relatively easy to add to the water softening chemicals. On the other hand, PURAFAX is a powder that has to be added to the water feed system daily. A gallon of ADDIT added to a hundred gallons of water softening chemicals generates a 20% saving. This is a sizeable amount for many boiler systems that typically utilize $2,000 to $100,000 worth of water softening chemicals each year. Sales Forecast in Line with the Proposed Production and Likely Demand at Various Prices An independent market survey found that in 1996, the market in Canada for water softener additives was approximately 2,700 tons of PURAFAX, which amounted to roughly $13.5 million. However, the potential for water softener additives was no less than three times that amount. A breakdown of sales by area is given in the table below. The average usage of water softener additive is around half a ton per year for large production plants. Table 1. Canadian market for water softener additive in 2000. Area Tons British Columbia 500 Alberta 450 Saskatchewan 150 Manitoba 250 Ontario 900 Quebec 280 Maritimes 180 Total 2,710 The sales group of Toronto Chemicals, Ltd. is broken up into six product divisions, each with it own manager and specialist salespeople. The water treatment group marketed, among other products, a fungus control chemical for industrial water treatment, certain chlorination agents and other minor products that represented small volume. The group, with one salesperson, makes up about 10% of the total sales. To market ADDIT, Toronto Chemicals, Ltd. employed two new salespeople who were knowledgeable in the water treatment field. Both would work from the Montreal office and cover Quebec and Ontario. The other markets in the remainder of Canada would be more efficiently handled by distributors. A new manager, Madeleine Morris, was seconded from WLI headquarters in the United States to head the group. Her experience in the development of ADDIT in the States was deemed a valuable resource to the Toronto Chemicals, Ltd. Costing and Amortization of New Machinery Acquired As soon as Madeleine arrived, she and TCL’s general manager began to draw up a marketing plan. From experience gained in the USA operation, they knew that proper and uniform addition of ADDIT into the water softener chemicals necessitates the use of a storage tank with automatic dispenser which must be fitted into the plant. The installation of these equipment cost $500, but customers would be asked to pay only $250 for the dispensing equipment. The more the general manager and Madeleine Morris analyzed the situation, the more they realized the importance of establishing a sound pricing structure from the start. They agreed on the following points: The cost of raw materials, direct labor, and packaging was $1.20 per gallon. Distribution, whether by TCL or a distributor, would add around 4% to the basic cost of ADDIT. New customers would contribute $250 towards the cost of the dispensing equipment while TCL would pay for the other $250. The new product should absorb $120,000 general administrative overhead and $60,000 of factory overhead a year. A new 3,000 square meter addition to the existing plant was constructed at a cost of $65 per square meter. A costing for this is yet to be determined and agreed upon. New machinery for the product was installed at a total cost of $75,000 and should be amortized. The existing and newly-employed salespeople would cost the company an average of $80,000 a year. This includes salary, expenses and other benefits. Two laboratory technicians were employed at a cost of $50,000 each per year. Madeleine Morris’s salary and expenses is $100,000 per year. The existing plant would produce 1.2 million gallons of ADDIT per year and, for an additional investment of $150,000, this amount could be increased five times. Promotion in the First and Subsequent Years Three marketing strategies were examined. The first approach was to compete with Chicago Chemical Company at the same price in which they sell PURAFAX. The second was to set the price lower than CCC. The third option was to charge a premium price for ADDIT. In comparing the prices of PURAFAX and ADDIT, the initial concern of PURAFAX being a powder and ADDIT a liquid was quickly surmounted. A pound of PURAFAX or one gallon of ADDIT is enough to improve 100 gallons of water softener chemical. To be able to sell a comparable product, the price per gallon of ADDIT was seen to be equivalent to the price per pound of PURAFAX. Projected Profit and Loss Accounts Based on Possible Price Levels If Toronto Chemicals, Ltd. would sell ADDIT at the same price that Chicago Chemical Company sells PURAFAX, the selling price would be $2.25 per gallon. This would make it easier for customers who would understand and be able to appreciate the option of a better product at the same price. The developers at Toronto Chemicals, Ltd. were not familiar enough with the market to assume the favorable acceptance of a higher price, but the marketing team knew that to cut price would be to invite retaliation from Chicago Chemical Company. A second approach was to price ADDIT lower than CCC’s PURAFAX. A reduction of say, 10%, would help them to get a foothold in the market. Although they were likely to receive some retaliation from Chicago Chemical Company, TCL’s basic costs would allow them to always price lower than CCC. However, to increase sales of an additive to water softener and thus reduce sales of softener chemicals would attract the attention of softener chemical companies who would resent a further reduction of turnover. The general manager at Toronto Chemicals, Ltd. attached some importance to this point because the firms producing the softening chemicals were large and could conceivably influence customers against ADDIT. Madeleine Morris questioned this; she believed that a customer would not be swayed by a campaign that would, in effect, be telling him or her not to buy a lower-priced product. The third possibility they considered was to charge a premium price of perhaps 10% higher than Chicago Chemical Company. ADDIT had two strong advantages over PURAFAX. First, can be automatically added to the water feed. Second, it has a rust-preventive component. ADDIT could be priced just below a combination of the price of PURAFAX and the cost of a rust inhibitor. This would make ADDIT roughly 10 to 15% more expensive than PURAFAX. A premium price would translate to higher margins and lower volume to recover overheads. The team considered this an attractive possibility because it would take time to penetrate the large Quebec and Ontario markets. Break-even Turnovers as Same, Higher and Lower Prices Looking at the present market, there is no known product that has the capability of ADDIT. But that doesn’t mean that targeting a high price would be reasonable. The first thing to consider is how to attract customers in patronizing the product. Though it gives the customers less expense in using the product, we have to consider the other products that are in the market and what customers are already accustomed to. So the breakdown on prices and their subsequent market reactions are as follows: Break-even If the company would produce the product and sell it on a break even price, the company might not even survive in a year’s time due to expenditures. Higher Price Setting the price at a higher level would not be as great as well since the product is very much new and even having the functionality and capability it has, setting the price high would make customers use what they are accustomed to using for a lower price. Lower Price Introductory price can be done to attract possible customers in trying this new product. This would mean cutting the production volumes to meet the overheads. But once the product gets accepted and much wider used by customers, the price can be set to a level wherein the company would see a margin of profit and can produce products. This way the company can gauge how the market would react. Cash flow at Same, Higher, Lower Prices Based on Various Forecast Market Shares in the First Three Years The forecast on market shares can only be determined if the company was able to strategize properly based on the metrics set. As a new product to be introduced in the market it is advisable to set an introductory price so as to catch the attention of would be customers. This way customers will take a good look at the product since its showing a much lower price. All it takes is to get the customers attention and the rest speaks for itself. Characteristics of possible marketing segments—buyers and engineers at PURAFAX present users and non-users It is going to be a fierce battle for the marketing segment. PURAFAX though has the advantage since it’s been in the market for years. So the only possible way to penetrate the market and eventually getting the market share is to set the price lower than that of PURAFAX. Once the ground work has been done and the marketing campaign is well established. It would just be a matter of time for customers to realize that there is a cheaper way. Consumers are all the same. Once they are given a better alternative at a reasonable price they would be easily converted even if after a few months the price on the product would change. But the key there is once the introductory price is over; the price that would be set should be competitive enough against PURAFAX. Large companies that have boilers would be easily converted once they were given a sampler. Once they see that the product really works and would show them the savings that they would be getting, they wouldn’t hesitate. So they key here is a working product plus a good marketing strategy. All companies always look for cost saving measures so it won’t be hard for them to convert. The only hardest part is convincing them to try the product. The best strategy there is to give them these large company a sample or taste of the product for free and just recover the losses later once they are convinced. Since this product would be launched at an introductory price it would be wise to set a margin for large companies. Meaning for volume sales they would get some kind of a rebate. Consumers tend to be easily converted given such options. Although water-producing companies do have the opportunity to produce softened water, they will not always do so. A water producing company only has to add a water softener in its water purification system, to produce softened water cheaply. But then consumers would not be able to have the choice to drink un-softened water. Hard water problems are most likely to occur when water is heated. As a result, hard water causes few problems to the water supplying companies, especially when only cold water runs through their pipes. Financial Analysis 1. Production and Sales Schedule 1.1 Annual Production Product Annual Production (kilograms)   Year 1 (40%, 50% & 30% Market Share) Year 2 (60%, 70% & 50% Market Share) Year 3 (80%, 90% & 70% Market Share)   ADDIT (in gallons at same price) 2,400,000.00 3,600,000.00 4,800,000.00   ADDIT (in gallons at 10% lower price and 10% higher demand)1 3,000,000.00 4,200,000.00 5,400,000.00   ADDIT (in gallons at 10% higher price ans 10% lower demand)2 1,800,000.00 3,000,000.00 4,200,000.00   Assumptions: 1. Demand will increase by 10% if ADDIT is priced at 10% lower. 2. Demand will decrease by 10% if ADDIT is priced at 10% higher than $2.25 per gallon 1.2 Price Per Gallon of ADDIT Product Price Per Kg     Year 1 Year 2 Year 3   ADDIT price same as Purafax 2.25 2.25 2.25   ADDIT price at 10% lower 2.03 2.03 2.03 ADDIT price at 10% higher 2.48 2.48 2.48 1.3. Annual Sales Per Product Product Annual Sales (PhP)   Year 1 Year 2 Year 3   ADDIT price same as Purafax 5,400,000.00 8,100,000.00 10,800,000.00   ADDIT price at 10% lower 6,075,000.00 8,505,000.00 10,935,000.00   ADDIT price at 10% higher 4,455,000.00 7,425,000.00 10,395,000.00   2. Property, Plant & Equipment (PPE) PPE Quantity/Unit Unit Cost Total Cost Building (3000 square meters) 3000 65.00 195,000.00 Plant (additional) 1 150,000.00 150,000.00 Machinery 1 75,000.00 75,000.00 Total     420,000.00 3. Depreciation Schedule Item Total Cost Useful Life Depreciation Expense       Year 1 Year 2 Year 3 Building (3000 square meters) 195,000.00 3 65,000.00 65,000.00 65,000.00 Plant (additional) 150,000.00 3 50,000.00 50,000.00 50,000.00 Machinery 75,000.00 3 25,000.00 25,000.00 25,000.00 Total 420,000.00   140,000.00 140,000.00 140,000.00 4. PROJECTED PROFIT AND LOSS STATEMENT (Price the same as Purafax) Particulars YEAR   1 2 3   Gross sales (in gallons) 2,400,000.00 3,600,000.00 4,800,000.00   x Selling price/gallon 2.25 2.25 2.25   Gross Sales 5,400,000.00 8,100,000.00 10,800,000.00   Less: Expenditures         Depreciation cost 140,000.00 140,000.00 140,000.00   Raw materials 2,880,000.00 4,320,000.00 5,760,000.00   Distribution cost 115,200.00 172,800.00 230,400.00   General admin. overhead 120,000.00 120,000.00 120,000.00   Factory overhead 60,000.00 60,000.00 60,000.00   Lab. Technicians (direct) 100,000.00 100,000.00 100,000.00   Dispensing equipment 1,350,000.00 1,350,000.00 1,350,000.00   Marketing salary and expenses 100,000.00 100,000.00 100,000.00   Total Expenditures 4,865,200.00 6,362,800.00 7,860,400.00             Net Profit before Income Tax 534,800.00 1,737,200.00 2,939,600.00   5. CASH FLOW STATEMENT Item Pre-operating Year     1 2 3   ESTIMATED CASH RECEIPT           Investment 420,000.00                     From Operation:           Net profit   534,800.00 1,737,200.00 2,939,600.00   Add back:           Depreciation   140,000.00 140,000.00 140,000.00   Total Cash receipt from Operation 0.00 674,800.00 1,877,200.00 3,079,600.00               TOTAL ESTIMATED CASH RECEIPTS 420,000.00 674,800.00 1,877,200.00 3,079,600.00               ESTIMATED CASH DISBURSEMENTS                       Capital Expenditures           Building (3000 square meters) 195,000.00         Plant (additional) 150,000.00         Machinery 75,000.00         Total Capital Expenditures 420,000.00 0 0 0               TOTAL ESTIMATED DISBURSEMENTS 420,000.00 0.00 0.00 0.00               NET CASH INFLOW (OUTFLOW) 0.00 674,800.00 1,877,200.00 3,079,600.00               CASH BALANCE, BEGINNING   0.00 674,800.00 2,552,000.00               CASH BALANCE, END 0.00 674,800.00 2,552,000.00 5,631,600.00   PROFITABILITY: Net Present Value (NPV) Method           Initial investment/Net income 420,000.00 674,800.00 1,877,200.00 3,079,600.00   Hurdle rate (18%)   0.85 0.72 0.61   Present values -420,000.00 571,864.41 1,348,175.81 1,874,339.64   NPV 3,374,379.85             Total Investment 420,000.00 Selling Price 2.25 Break-even point (in gallons) 400,000.00 Contribution margin per gallon 1.05 Profit margin (%) 34.76 Break-even period (in year) 0.17 Average net income/year 1,877,200.00 Average return of Investment/year (%) 446.95 6. PROJECTED PROFIT AND LOSS STATEMENT (Price at 10% lower) Particulars YEAR   1 2 3   Gross sales (in gallons) 3,000,000.00 4,200,000.00 5,400,000.00   x Selling price/gallon 2.03 2.03 2.03   Gross Sales 6,075,000.00 8,505,000.00 10,935,000.00   Less: Expenditures         Depreciation cost 140,000.00 140,000.00 140,000.00   Raw materials 3,600,000.00 5,040,000.00 6,480,000.00   Distribution cost 144,000.00 201,600.00 259,200.00   General admin. overhead 120,000.00 120,000.00 120,000.00   Factory overhead 60,000.00 60,000.00 60,000.00   Lab. Technicians (direct) 100,000.00 100,000.00 100,000.00   Dispensing equipment 1,350,000.00 1,350,000.00 1,350,000.00   Marketing salary and expenses 100,000.00 100,000.00 100,000.00   Total Expenditures 5,614,000.00 7,111,600.00 8,609,200.00             Net Profit before Income Tax 461,000.00 1,393,400.00 2,325,800.00   5. CASH FLOW STATEMENT Item Pre-operating Year     1 2 3   ESTIMATED CASH RECEIPT           Investment 420,000.00                     From Operation:           Net profit   461,000.00 1,393,400.00 2,325,800.00   Add back:           Depreciation   140,000.00 140,000.00 140,000.00   Total Cash receipt from Operation 0.00 601,000.00 1,533,400.00 2,465,800.00               TOTAL ESTIMATED CASH RECEIPTS 420,000.00 601,000.00 1,533,400.00 2,465,800.00               ESTIMATED CASH DISBURSEMENTS                       Capital Expenditures           Building (3000 square meters) 195,000.00         Plant (additional) 150,000.00         Machinery 75,000.00         Total Capital Expenditures 420,000.00 0 0 0               TOTAL ESTIMATED DISBURSEMENTS 420,000.00 0.00 0.00 0.00               NET CASH INFLOW (OUTFLOW) 0.00 601,000.00 1,533,400.00 2,465,800.00               CASH BALANCE, BEGINNING   0.00 601,000.00 2,134,400.00               CASH BALANCE, END 0.00 601,000.00 2,134,400.00 4,600,200.00   PROFITABILITY: Net Present Value (NPV) Method           Initial investment/Net income 420,000.00 601,000.00 1,533,400.00 2,465,800.00   Hurdle rate (18%)   0.85 0.72 0.61   Present values -420,000.00 509,322.03 1,101,264.00 1,500,762.01   NPV 2,691,348.04             Total Investment 420,000.00 Selling Price 2.03 Break-even point (in gallons) 509,090.91 Contribution margin per gallon 0.83 Profit margin (%) 25.24 Break-even period (in year) 0.17 Average net income/year 1,533,400.00 Average return of Investment/year (%) 365.10 7. PROJECTED PROFIT AND LOSS STATEMENT (Price at 10% higher) Particulars YEAR   1 2 3   Gross sales (in gallons) 1,800,000.00 3,000,000.00 4,200,000.00   x Selling price/gallon 2.48 2.48 2.48   Gross Sales 4,455,000.00 7,425,000.00 10,395,000.00   Less: Expenditures         Depreciation cost 140,000.00 140,000.00 140,000.00   Raw materials 2,160,000.00 3,600,000.00 5,040,000.00   Distribution cost 86,400.00 144,000.00 201,600.00   General admin. overhead 120,000.00 120,000.00 120,000.00   Factory overhead 60,000.00 60,000.00 60,000.00   Lab. Technicians (direct) 100,000.00 100,000.00 100,000.00   Dispensing equipment 1,350,000.00 1,350,000.00 1,350,000.00   Marketing salary and expenses 100,000.00 100,000.00 100,000.00   Total Expenditures 4,116,400.00 5,614,000.00 7,111,600.00             Net Profit before Income Tax 338,600.00 1,811,000.00 3,283,400.00   8. CASH FLOW STATEMENT Item Pre-operating Year     1 2 3 ESTIMATED CASH RECEIPT         Equity (Cash) 420,000.00                 From Operation:         Net profit   338,600.00 1,811,000.00 3,283,400.00 Add back:         Depreciation   140,000.00 140,000.00 140,000.00 Total Cash receipt from Operation 0.00 478,600.00 1,951,000.00 3,423,400.00           TOTAL ESTIMATED CASH RECEIPTS 420,000.00 478,600.00 1,951,000.00 3,423,400.00           ESTIMATED CASH DISBURSEMENTS                   Capital Expenditures         Building (3000 square meters) 195,000.00       Plant (additional) 150,000.00       Machinery 75,000.00       Total Capital Expenditures 420,000.00 0 0 0           TOTAL ESTIMATED DISBURSEMENTS 420,000.00 0.00 0.00 0.00           NET CASH INFLOW (OUTFLOW) 0.00 478,600.00 1,951,000.00 3,423,400.00           CASH BALANCE, BEGINNING   0.00 478,600.00 2,429,600.00           CASH BALANCE, END 0.00 478,600.00 2,429,600.00 5,853,000.00 PROFITABILITY: Net Present Value (NPV) Method         Initial investment/Net income 420,000.00 478,600.00 1,951,000.00 3,423,400.00 Hurdle rate (18%)   0.85 0.72 0.61 Present values -420,000.00 405,593.22 1,401,177.82 2,083,586.93 NPV 3,470,357.97           Total Investment 420,000.00 Selling Price 2.48 Break-even point (in gallons) 329,411.76 Contribution margin per gallon 1.28 Profit margin (%) 43.79 Break-even period (in year) 0.18 Average net income/year 1,951,000.00 Average return of Investment/year (%) 464.52 9. COMPARATIVE SUMMARY OF PROFITABILITY Particulars Same Price ($2.25/gallon) Lowe Price ($2.03/gallon) Higher Price ($2.48/gallon) Net Present Value @18% hurdle rate 3,374,379.85 2,691,348.04 3,470,357.97   Initial investment 420,000.00 420,000.00 420,000.00   Break-even point (in gallons) 400,000.00 509,090.91 329,411.76 Contribution margin per gallon 1.05 0.83 1.28 Profit margin (%) 34.76 25.24 43.79 Break-even period (in year) 0.17 0.17 0.18 Average net income/year 1,877,200.00 1,533,400.00 1,951,000.00 Average return of Investment/year (%) 446.95 365.10 464.52 Summary of Findings and Recommendations Based on the financial projections and analysis conducted, the significant findings are as follows: 1. Initially, at the price of $2.25 per gallon, TCL will cover 40% with a total production and sales volume of 2.4 million gallons. During the second year, 60% of the market will be attained (3.6 million gallons) and 80% (or 4.8 millions) of the market requirement will be supplied by TCL (Table 1.1). 2. The available options for TCL are: (1) price ADDIT at $2.25 per gallon, which is equal to the selling price of Purafax; (2) price it at $2.03 per gallon or 10% lower than the price of its competing product (Purafax); and (3) price it at premium or $2.45 per gallon (Table 1.2). 3. It was assumed that demand will increase by 10%, if ADDIT is priced at 10% lower ($2.03 per gallon). At such price level, TCL will attain 50% share of the market or around 3 million gallons of ADDIT will be produced and sold during year 1. Around 4.2 million gallons will be sold during the second year covering 70% of the market and 90% market share (5.4 million gallons) will be serviced by TCL (Table 1.1). 4. The total cost of investment to put up the manufacturing plant and machinery to produce ADDIT is $420,000.00 (Table 2). With an estimated life of only three years, it was estimated that the annual depreciation is $140,000.00. 5. At the price of $2.25 per gallon, the contribution margin to recover the fixed investment (including profit) is $1.05 per gallon. TCL will attain the breakeven point after producing 400,000 gallons within less than three months of operation. After three years, TCL’s operation will be profitable with an average net income per year of $1.88 million and average return of investment (ROI) of 447%. The bottom line is that the business operation of TCL will be comparatively better than other businesses with only 18% rate of return because at the hurdle rate of 18% the net present value of income streams after 3 years is $3.4 million (Table 4 & 5). 6. If ADDIT will be priced at 10% lower ($2.03 per gallon selling price), the contribution margin per gallon is lower ($0.83 only). It is expected that there will be increase in sales, however breakeven will be attained much longer after producing 509,091 gallons. Compared to the pricing of $2.25 per gallon, the average net income over a period of three years is lower at $1.4 million only. Although there is an increased foothold on the market, ROI will only be 328% and the net present value of returns discounted at 18% will only be $2.32 million in three years (Table 6 & 5). This not a business option because of the lower returns and possibility of retaliation from Purafax and engaging the competitor is a price war, which will further lower the earnings of TCL. 7. Pricing ADDIT at a premium is highly recommended. If the pricing level of $2.48 per gallon will be implemented, there will be increases in the profitability indicators and recovery of the fixed investment will be faster. Breakeven point in volume will be attained after producing only 329,412 gallons of ADDIT. Contribution margin per gallon will be higher at $1.28 per gallon, the average net income in a year will be $2.2 million and ROI per year will be at its highest at 523%. This option is highly profitable because at the discount rate of 18%, the net present value of income streams over a period of 5 years is around $4.06 million. However, this option will expose the business to the risk of reduction in sales due to increase in price. Market penetration or gaining foothold of the larger market will be slower under premium pricing scheme, however another option to implement it is to initially offer introductory price to hasten product acceptance and then later ride on its competitive advantage over its competitors. Conclusion Hard water substantially increases energy consumption, which necessitates equipment downtime for cleaning and results in the early renewal of capital equipment. Executives involved in running a business, local government department or institution are under increasing pressure to cut costs and become more efficient. Water softening is an important process, because the hardness of water in households and companies is reduced during this process. When water is hard, it can clog pipes and soap will dissolve in it less easily. Water softening can prevent these negative effects. Hard water causes a higher risk of lime scale deposits in household water systems. Due to this lime scale build-up, pipes are blocked and the efficiency of hot boilers and tanks is reduced. This increases the cost of domestic water heating by about fifteen to twenty percent. Another negative effect of lime scale is that it has damaging effects on household machinery, such as laundry machines. Water softening means, it would expand the life span of household machine, such as laundry machines, and the life span of pipelines. It also contributes to the improved working, and longer lifespan of solar heating systems, air conditioning units and many other water-based applications. Some softeners are more efficient than others and as a result the prizes may differ. There are time operated softeners and water meter-controlled softeners available. The water meter-controlled units produce the softest water per pound of salt. Some softeners work on electricity, but some more recent water softeners use waterpower. Costs of a water softener greatly depend upon the type of water softener and the type of energy that is used, but also upon the hardness of the water that needs softening and the water use. When the water is very hard and it is used heavily, the costs of softening will rise. Generally the costs of a water softener can vary between € 0.20 and € 0.40 a day. The costs of water softeners are usually far outweighed by the benefits and cost savings obtained, through using softened water. The struggle to get the market share on water softener chemicals and such has been an ongoing struggle. Large company’s that produces softener chemicals wasn’t able to create a product that would eliminate combining their products with another product. So, ADDIT’s feature and capability surpasses both powder and softener chemicals and even has the capability to eliminate rust. But the key here is the pricing and marketing strategy that they would use. Since ADDIT would have a huge impact on both companies, meaning CCC and softener chemical companies. Failure to come up with a win-win strategy the large softener companies might come up with strategies that might undermine ADDIT. But Madeleine is correct in saying that consumers cannot be manipulated by companies who cannot give them the same results for a lower price. So the most probable strategy for these companies would either come up with a similar product for a much lower price or accessibly lowering their existing price for softener chemicals to compete with ADDIT. Based on the capability of ADDIT, even if these large companies lower their product price, they would still be at a loss since ADDIT is an all on one product whereas softener chemicals needs to have another product work with them. Bottom-line no matter what marketing strategies they create, they would not be able to get a large share of the market unless they come up with a comparable product that could eventually match or even be more that what ADDIT can provide. But for the moment based on what has been discussed on this paper. ADDIT has a very big chance in penetrating the market. All it takes is a working product and a feasible marketing strategy. Read More