Clipboard Tablet Sim Term Paper

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CVP Analysis

Last time, strategies were developed for the different products, the X5, X6 and X7. The strategies were based on cost-volume-profit analysis, the product life cycle and different pricing strategies. This report will highlight the results of those strategies, and explain why they occurred, based on the underlying theories. The X5 analysis showed that increasing the price would deliver lower sales volume, but higher overall profit. The same showed for the X6. With the X7 there was maybe not as much data. The elasticity was not known. But we do know the following about the X7: It is a low-priced good that was not selling well at $195. Thus, it stands to reason, even without knowing the elasticities, that the X7 will benefit from a lower selling price. The tactics are therefore

Year by Year Decisions: Pricing & R&D Allocations

PRODUCT

DECISION

2011

2012

2013

2014

2015

X5

Price

$285

$280

$280

$280

R&D %

33%

0%

0%

0%

0%

Discontinue?

NO

NO

NO

NO

YES

X6

Price

$420

$441

$441

$441

$441

R&D %

34%

40%

40%

40%

0%

Discontinue?

NO

NO

NO

NO

NO

X7

Price

$195

$165

$165

$165

$165

R&D %

33%

60%

60%

60%

Discontinue?

NO

NO

NO

NO

NO

Report on Results

Cumulative Profit

2011

$81,571,138

2012

$361,796,857

2013

$849,408,401

2014

$1,372,679,239

2015

$1,612,592,251

The table above shows that the organization fared better under the new calculations. There are a few different explanations for this. In 2012 and 2013, the X5 and X6 were at growth stages of the product life cycle and were the major drivers of profit. The X7 was actually losing money in these years -- more on that later. But the X5 continued until 2014, and it was profitable the entire way, which is what was predicted. The cost-volume-profit analysis showed that increasing the price would probably deliver a much higher profit than before.

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While a higher price would mean that slightly fewer units would be sold, the higher selling price would make up for that. The result is that by the 2014-year, the last one of selling the X5, it would still be profitable. Indeed, that was the case. The product had 93% of saturation, which is an indicator that a few sales were left on the table, but the profit of $132,844,724 in the 2014-year showed that the company was getting the highest revenue out of this product. The fact that this was one without any R&D investment shows that the product is, based on its attributes and positioning in the market, a compelling proposition for consumers. With low elasticity, the CVP analysis correctly showed that increasing the price would increase the profit.

This product continued to be a profit driver. The scenario takes us through the peak earning years of this product, to the maturity stage of the product life cycle. Therefore, strong sales are expected, especially if the product is supported by R&D investments. The CVP analysis showed that consumers had a fairly low elasticity for this product, and therefore an increase in price would deliver an increase in profits. The price of $441 appeared to have precisely this effect. By 2015, the X6 has reached 92% saturation, and had a profit of $159,126,896. It is likely that if we are going into 2016, that this product will be cut from the lineup. What this means is that the behavior with respect to this product is basically the same as with the X5, where increasing the price is going to increase the profits, at least to a certain point. You want to increase sales, but there is a constraint on sales. By the time we get to 92% saturation,.....

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