Time Warp 2
The cost volume profit analysis one of the valuable tools that management can use to control its costs. In this process the management is able to divide the costs into their components and also trace the costs to the unit product. This will enable the organization to better manage its costs and maximize its profits. This analysis can therefore help company the level of volume that must be produced to remain profitable and make necessary decisions on whether to continue with the production of a particular product or not.CVP analysis is a strong tool for companies that are involved in the production of more than one brand of product. Handheld Corporation can therefore make use of the CVP to make proper decisions with regard to cost allocation to the different products depending on other factors that are anchored in its strategy (Hirsch, 2000). The company currently produces three products the x5, x6 and x7 with different characteristics. This paper will therefore employ different strategies in costing to maximize on the value of the company based on the three products (Hischey,2008).
This plastic based computer has been in the market for a long period compared to the other brands and has managed to capture a reasonable market share. To date the company has managed to capture a substantial level of the market and hence it’s approaching its maturity stage. This means that the management will not make aggressive policies with regards to cost allocations. The main aim of this product is to ensure that the firm gets the maximum benefit at fewer costs. The management will therefore continue reducing the research and development expenditure on this product by 5%for the next three years as it plans to withdraw the product from the market in the fourth year. During the first year the management intends to reduce the price of this product by 10% to possibly capture the remaining market and then maintain it at the same level until it’s withdrawn from the market.
This computer is made of flat metal and stands out to be a product with high quality and some sense of durability. The product has been in the market for the last two years. Due to its quality the product can attract the best customers and hence the firm may use this to increase its prices. The product development stage must have been excellent and the product therefore enjoys a lot of acceptance from the customer. Much of the effort is therefore needed in marketing to capture the market and hence the firm should increase its research and development by 2% in the next two years and maintain stability thereafter as the product will have gained the market share required. Since the customers have recognized its quality the firm will continue with a higher price to take advantage of brand equity. The firm will therefore increase the price by 20% in the first two years and then increase it by 30% in the third and fourth year respectively.
This product is the newest in the market and has not done well so far hence the firm needs to do a lot I terms of research and development. The computer has a colored case and despite efforts by the management its market penetration has remained low. It’s however worth noting that this product has the highest market potetential at 14 million which probably makes it mass market product with target on low end customers. This product can therefore survive under different economic conditions and hence the company should strongly consider investing heavily on it. The firm will increase the research and development allocation by 4% in the first year, 3% in the second year,5% in the third year and 18% in the third year. This allocation will be able to enable the firm redesign the product and capture the 14 million potential customers. The price is a major concern for this type of product and the management fully recognizes these concerns. As the firm strives to cover a larger market with this product it will pass the incentives to the consumers hence the price will be reduced by 10% in the first two years then 5% in the third year and an increase by 30% in the fourth year as the products enters maturity stage (Lal,2008).
I. Year 2006:
During the first year the firm increased the research and development expenditure on x6 and x7 respectively to 36% while that of x5 was reduced to 28%.During the same year the price of the x was reduced by 10% to 225.During the same year the management increased the price of x6 by 20% to 480 and also reduce that of x7 by 10% to 180.The overall result of this strategy is shown in the table below:
Price $ 225.00
Sales Revenue $ 223,941,176.47
During the first year the company will need to sell a volume of 995294 to achieve the desired profits of 90000000.The above table shows the results of changing the price to and reduction of the research and development for x5
For the case of x6 the price was increased by 20% and the research and development expenditure increased to 36% with expectation of target profits of 120000000 due to the fact that the product enjoyed consumer equity (Pirayoff, 2004). The results were as follows:
Price $ 480.00
Sales Revenue $ 125,929,411.76
The firm would realize a ROS of 9.53 at this price and research and development expenditure.
X7 has not been impressive in the last one year and the firm has started in vesting a lot on research and product development and hence a target profit of 5 million is required for this product. Using the price and the research expenditures as explained above the firm would realize a revenues and volumes as shown below:
Price $ 180.00
Sales Revenue $ 369,900,000.00
Although the return on sales is still low at 1.35% the firm has made some progress by lowering the price and increasing the research and development expenditure. The volumes have also gone up to 2055000 which clearly demonstrate that the firm is making some progress in recovering the market.
II. Year 2007:
During this year the firm made some changes to its research and development expenditure as well as pricing strategies. The firm reduced its profit projections for x5 to 45million and also maintained the price at the same level as the previous year. Research and development expenditure was maintained at the same level as 2006 as much was not required for this product. For x6 the firm had to further take incentive for the brand equity and increase the price to 576 but slightly increase the research and development expenditure to 38%.X7 was doing well as it covers the market and hence the firm had to make further investments on research and development which was increased to 39% while the price was lowered to 162.The profit targets for x6 and x7 stood at 12million and 10 million respectively (Porter & Norton, 2010).The results were as follows:
Price $ 225.00
Sales Revenue $ 319,235,294.12
In this case the volume would go up to 1418824 from the previous years 990000.The ROS will also improve to 14% during the same year. These points at success of the strategy and the firm will be able to capture the remaining market share.
Price $ 576.00
Sales Revenue $ 118,370,642.20
This product is mainly for high end customers and hence the high price will affect volume but nonetheless the firm has recorded a slight reduction volume but the ROS has gone up.
Price $ 162.00
Sales Revenue $ 646,527,272.73
This product has the highest market potential and the firm is doing well in capturing the market and as such the volume will go up to 4 million as a result of the strategy by the management. The ROS will also be maintained at 1.55% up from 1.3% in the previous year.
III. Year 2008:
During this year the firm introduced other policies with regards to pricing and research with different target profits. For X5 the company maintained the research and development expenditure as the product was fully in maturity stage and maintained the price at 225.X6 was now approaching maturity and hence the management still went for skimming prices to allow the firm gets maximum value from the brand equity. The price was increased to 749 while research and development expenditure was maintained at 38%.x7 was still striving to capture the huge market potential it had and hence the price was further reduced to 154 while R&D was increased to 44%.The target profits were 12 million for x5, 20 million for x6 and 15million for x7. The results were as follows:
Price $ 225.00
Sales Revenue $ 231,882,352.94
Price $ 749.00
Sales Revenue $ 120,036,781.61
Price $ 154.00
Sales Revenue ##############
From the above results x7 has significantly increased its volume and profits while x6 has maintained stability with slight reduction in volume.X5 has recorded reduction volume which points at its need for replacement as the customers have fully enjoyed its benefits and needs a change.
IV. Year 2009:
During this period the firm decided to remove x5 so that more resources can be invested in the development of x7 which still has more than 50% of its market capacity to cover. The removal of x5 will also reduce the overall costs of operations for the firm. The firm increased the research and development expenditure for x7 to 62% and that of x6 to 38%.To further take advantage of the brand equity the price of x6 was increased to 974 and that of x7 was increased to 200.The target profits for x6 were 10million while that of x7 was 20million.The results of the new initiatives were as follows:
Price $ 200.00
Sales Revenue $ 341,333,333.33
Price $ 974.00
Sales Revenue $ 102,305,035.97
From the above results x6 has fully attained maturity and is currently producing stable returns for the firm although the volumes have slightly gone down the firm still remain profitable.x7 on the other hand has reached maturity and the volumes have started declining but still remain high the firm will therefore manage to capture the desired market share in the next few years.
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Hirschey,M.(2008). Managerial economics.12th ed. Mason, OH : South-Western
Lal,J.(2008). Cost Accounting. [S.l.] : Mcgraw Hill Asia.
Pirayoff,R.(2004). CliffsAP Economics Micro & Macro. Hoboken, NJ : Wiley.
Porter,A.G. & Norton,C.L.(2010). Using Financial Accounting Information: The
Alternative to Debits and Credits. South-Western Pub.