CVP Analysis in time warp 3

CVP Analysis for Time Warp 3

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CVP Analysis for Time Warp 3

After using the CVP analysis and calculator to make decisions for time warp 2, I implemented the decisions and achieved the following results.

Revenue

Time X5 X6

2011 276159075.2 242073200

2012 376875726.7 417326101

2013 413598878.5 790860175.3

2014 407248197.7 1162873769

2015 473103169.4 1015041257

Profits

Time X5 X6

2011 43991297.97 37579839.72

2012 105703584.8 135436766.8

2013 130153263.8 305720039.4

2014 126855795 476469232.5

2015 146300181.7 341456745.6

Sales

Time X5 X6

2011 968979.2111 562960.9303

2012 1243814.28 836324.8517

2013 1325637.431 1575418.676

2014 1305282.685 2307289.225

2015 1614686.585 2260670.952

The cumulative profit after the 4 years was actually 1,849,666,747, less than the 1,873,011,484 achieved in time warp 1, and well below the 2,100,000,000 target set prior to the analysis. In order to determine where the strategy went wrong an individual analysis of the individual products over the four years compared to their performance in time warp 1

X5

During 2012, the X5 sold 1243814.28, well below the 1301944 sold in time warp one, in 2013, sales were also below the volumes achieved in time warp one, as units sold were 1325637.431, less than the 1633801 recorded in time warp 1. The same story was also observed in 2014 with the X5 recording sales of 1305282.685, well below the 1589921.06 units sold in time warp 1 the final year also followed the same pattern with sales realized 34,593 units below the ones achieved in time warp 1

X6

The sales for the X6 also suffered with the number of units sold in 2012 being 836324.8517, almost 100,000 units below the 936230.82 realized in time warp 1, the sales in 2013 were also293,000 units less than those achieved in time warp 1, in 2014 the story followed the same pattern, with the difference growing to a significant 441,453 units. The final year also saw sales volumes rise above the figures achieved in time warp one by 341,473, although not enough to cover the deficits realized in the previous years.

Overall it is quite clear why the target figures were not achieved, the sales volumes realized were nowhere near the projected figures. In order to recover these differences and achieve the target profits, a CVP analysis of the two products will once again be conducted. The X7 will still remain discontinued as making it a profitable venture will be quite difficult, more so considering that the time within which it is supposed to achieve profitability is not really sufficient (Nagle & Holden, 2001).

The X5

The target ratios of profits allocated previously will still be utilized in this CVP analysis, meaning that the target profits and target volumes for the X5 over the four years will be as follows:

2012: 124,335,218 – Profit

1301944.1174263835 – Sales

2013: 180,294,140 – Profit

1633800.8613710431 – Sales

2014: 172,696,773 – Profit

1589921.0637384425 – Sales

2015: 151,180,322 – Profits

1649279.3982018265 – Sales

The reason behind the decline in sales is actually the difference in pricing strategy employed, more so in terms of the variance in pricing, as well as the fact that it was above the figures used in time warp one. In order to realize similar unit sales as the ones achieved in time warp one, the price will be adjusted in a way that results in a figure as close to the ones used in time warp one as possible. In order to achieve that as well as realize the target profit, the costs will also have to be reduced, more so the R&D costs, as the performance did not seem to improve as significantly as it should have only improving by 0.04, despite cumulative costs of 38,400,000. This is also based on the fact that customers are not really worried about performance for the first 3 years.

The fixed costs for the year 2012 were adjusted downwards by 6,000,000, as the R&D costs have been adjusted downwards to 15%. This therefore means that the new fixed costs amount to 78,600,000. The target volume is set at 1301944 and target profit at 124,335,218, while the variable costs are assumed to be 185,691,618, roughly translating into a per unit variable cost of $143. With these figures, the ideal price according to the CVP calculator is actually $298.87, which will be rounded off to $299. For 2012 in time warp 3, the price for the X5 will be $299 and the R&D costs will be 15%.

In 2013, the R&D costs will still remain at 15% and the target profit will be 180,294,140, with the target sales being 1633800. The variable cost per unit will be adjusted upwards to $150. In order to achieve the profit and target sales, the CVP calculator sets the new price at 308.5, which based on the previous performance in time warp 2 seems a bit high. I will therefore ignore the new pricing and gamble with the earlier set price of $299. The price for 2012 will therefore be $299, with the R&D costs fixed at 15% (Engelson, 1999).

In 2014, the same fixed and per unit variable costs will apply but the target profit will change to 172,696,773, with the target sales also changing to 1589921. Using these new figures, the CVP calculator puts the ideal price at $308.06, although based on the earlier assessment as well as in order to maintain pricing stability the price will still remain at $299, with the R&D costs also remaining at 15%.

For the final year, considering that the product will be in its shake out phase, the R&D costs will be reduced even further in order to allow for a drastic reduction in price to further drive up sales. The new R&D costs for the year 2015 will therefore be 10%, with the per unit variable cost remaining at $150. The target profit will then be changed to 151,180,322 and the target sales be set at 1649279. The CVP calculator sets the ideal price at $288.6, which will be rounded off to $289, meaning that the price for the year 2015 will be set at $289 and the R&D costs set at 10%

The X6

Similarly to the X5 the sales for the X6 suffered in time warp 2 and this could probably be attributed to pricing. As such, the pricing of the X6 will be adjusted slightly downwards in order to realize the target sales.

For 2012, the fixed costs will be reduced compared to figures used in time warp 1, by reducing the R&D costs to 45%. The per unit variable cost would be $275, with a projected sales volume of and a target profit of 158,244,823, the CVP calculator puts the ideal price for the X6 at $495.6, which can then be rounded off to $496. For the year 2012, the R&D costs will be set at 45% and the price at $496.

In 2013 the R&D costs will remain the same while the variable cost per unit will also remain at $275. The new target profit will be 372,755,368, while the expected sales will be 1868500. According to the CVP calculator, the ideal price will then be $500.34, which will be adjusted to $499 in order to ensure the $500 mark is not exceeded, and to give the customers an illusion that the X6 is actually cheaper than it should be (Jensen, 2004).

In 2014, with similar R&D costs as well as variable costs, the target profits will be 578,158,763, with the projected sales being 2748742. The ideal price according to the CVP calculator will then be 502.91, which I will decide to ignore and leave the price at $499, in order not to cross the $500 barrier as well as to ensure pricing stability.

In 2015, R&D costs unlike for the X5 will still remain the same due to the fact that sales for the X6 are actually based on performance. The variable per unit cost will also stay fixed at $275, with the target sales being set at 1919198 and the target profit at $280,763,454. I found the ideal price to be $446.5, although due to the earlier concessions made to achieve pricing stability the new price will actually be set at $459 in order to cover the deficits accrued. The pricing will therefore be set at $459 while the R&D costs remain at 45%.

References

Engelson, M. (1999). Pricing Strategy: An Interdisciplinary Approach. Joint ManagementStrategy.

HYPERLINK “http://forio.com/simulate/jelson/tablet-development-sim-1/simulation/#p=page0” http://forio.com/simulate/jelson/tablet-development-sim-1/simulation/#p=page0

Jensen, M. (2004). Pricing Psychology Report. Jensen-Fann Publishers.

Nagle, T., & Holden, R. (2001). The Strategy and Tactics of Pricing: A Guide to ProfitableDecision Making. Prentice Hall.