Time Warp 3

Time Warp 3

The CPV analysis that was carried out on three products was a valuable undertaking as the company was able to clearly allocate the costs and determine the contributions that costs, volume and profit have on the business process. One of the key areas covered was minimum amount of volume that the business had to achieve to break even and also attain desirable level of profits. The strategy that the management used was maximizing the volume of the products that had a larger market potential by lowering their prices and increasing the research and development expenditure. The firm also used stability strategy on brands that had good market coverage and brand equity (Lucey, 2003).The process led to the establishment of the appropriate prices, research and development costs as well as discontinuation decisions. This time warp three will therefore use the results from time wrap 2 to make better decisions.
i. X5:
This brand of computer was the oldest in the market and having reached its maturity stage the management found it necessary to maintain stability and hence the price was reduced from the original 250 to 225 which was aimed at mopping up the market that was still uncovered. The next stage was to keep the price at that level as the firm leverages on its large market base. Based on the time wrap 2 results it would be prudent to further cut the prices from 250 to 229 in 2006 and then maintain it at 228 in 2007 with the view of withdrawing the product from the market in the second year. It was noted that the product proved to be costly for the firm in time wrap 2.Th research and development expenditure will be reduced to 27% in 2006 and then to 26% in 2007.

X6:
This is a brand that the firm used to advance its stability strategies and as such it had not been in the market for a long period but the quality of the product had attracted the customers and hence the firm was at liberty to employ skimming pricing strategy. In this regard the firm increased the price from 400 to 480 and the trend continued for the four years. The prices were 567,749 and 974 in 2007, 2008 and 2009 respectively. The firm will continue with stability strategy by using skimming prices and hence the price will be adjusted to 482,500,700 and 650 in 2006, 2007, 2008 and 2009 respectively. Research and development expenditure will change as follows: 35%, 34%, 42% and 30% in 2006, 2007, 2008 and 2009 respectively.
ii. X7:
This was the newest product in the market having stayed for only one year but the product did not attract more customers as expected given its high market potential. The management needed to put many efforts to revitalize this brand to get ready for its future growth and to successful act as replacement for x5, which had reached maturity. The firm therefore reduced the price to attract more customers but at the same time increased the expenditure of research and development as part of a program to make it more attractive. The price was therefore maintained at 200 in the first year then followed by a further reduction to 180 in the second and third year. The huge allocations of research and development and the withdrawal of x5 finally opened up the market for this brand and hence with the increased demand the management increased the price to 250 in the fourth year. Research and development is still expected to play a major role in revitalizing the brand and hence the expenditure will be progressive in nature. It will spend 38% in 2006, 40% in 2007, 58% in 2008 and 70% in 2009.
2. Report:
After using the CVP analysis in the second SLP the management applied, the PDA simulation to determine the actual outcome of the strategies described above. The results were as follows.
I. 2006 Profit:
2006 Profit
2006 Profit
307,562,490
X5 Profit
166,681,187
X6 Profit
135,562,077
X7 Profit
5,319,226

The firms overall profitability increased to using time wrap 2 strategies $307,562,490

With all the three products recording positive profits. The decision led to jump in x5 revenue to its maximum but x6 maintained stability in its revenues while x7 recorded a slight increase in its revenues.x6 maintained stability while x7 recorded a slight increase in revenues. The firm therefore managed to achieve its goal of mopping out the market potential exhibited by x5 before its discontinuation. The firm realized an overall change of profits at 38% and an economic value added of 85%.Although the results were not as impressive as they were under time wrap2 the firms goal of fully exploiting x5 was achieved. The overall result is shown by the revenue graph below:

II. 2007 Profit:
2007 Profit
177,340,587
X5 Profits
594,041
X6 Profit
143,612,005
X7 Profit
33,134,541

In the year 2007, the profits of the firm dropped drastically to $177,340,587 due to the high costs of maintaining x5, which had reached its maximum saturation point, but the firm retained it.x6 and x7 however continued to perform better and recorded some impressive results. The firm’s ultimate goal of making x7 its product of the future has finally started paying off and the product has recorded a sharp increase in sales. The performance of x6 remained steady as the profits went up by 39% compared to 2006 where it recorded 37% profitability. The performance of all the three products remains high but x5 is declining. The firm’s profitability therefore dropped from 29% to 29% as well as other measures like EVA that declined to -43%.x5 has to be withdrawn from the market at this point. This can be demonstrated by the profit revenue graph below:

III. 2008 Profit:
2008 Profit
117,892,974
X5 Profit
0
X6 Profit
42,765,158
X7 Profit
75,127,816

From the above results, the firm still realized a decline in overall profitability to $117,892,974

But it’s was worth noting that x7 made a major contribution towards the profits with a total of $ 75,127,816 which was quite impressive. X6 continued with its stability in performance as its approaching the maturity stage. Although the firm was strongly on profitability strategies in the first year. It has since changed its strategy with being to promote x7 which has a bright future with a large market potential. The other brands have since been affected but this is a short-term problem. The firm has also decided to maintain x6 because it has really gained the brand equity and can be used to attract the customers towards their mainstream brand of x7.In these regard non financial strategies have been employed in the last two years and once the firms gets its foothold in the market using x7 it will revert back to its profitability strategy. A look at the profit graph shown below can clearly demonstrate the new strategy the firm is employing (Droms & Wright, 2010)
IV. 2009 profit:
Total profits:
144,261,626
X6 profits:
65,139,401
X7 profits:
79,122,225

The firm decided to withdraw x5 and further utilize resources in x7, which still has a larger market potential. The new decision has led to an increase in the profitability by 38%.The management has therefore managed to reduce the costs of operation by 15% after the withdrawal of x5.The net profits realized were $144,261,626.The profit graph clearly demonstrate the success of the new strategy as the firms has fully leveraged on x7 and with x6 maintaining stability in the market. This is shown in the profit graph below:

The total score from the four strategies from the PDA simulation has been 957,337,792
The table below shows the results from PDA simulation using the figures for Time warp 2 decisions:

X5:
year price R&D expense discontinuation net profit
2006 Time wrap2 225 28% no 177,264,481
Time wrap3 229 27% No 166,681,187
2007 Time wrap2 225 23% no -21,157,302
Time wra3 228 26% no 594,041
2008 Time wrap2 225 18% No -32,746,392
Time wrap3 00 0% yes 00
2009 Time wrap2 00 0% yes 00
Time wrap3 00 0% yes 00

X6:
year price R&D Discontinuation Net profit
2006 Time wrap2 480 36% No 136,273,799

Time wrap3 482 35% No 135,562,077
2007 Time wrap2 567 38% No 108,169,503
Time wrap3 500 34% No 143,612,005
2008 Time wrap2 749 38% No 39,877,796
Time wrap3 700 42% No 42,765,158
2009 Time wrap2 974 38% No 423,359
Time wrap3 650 30% No 65,139,401

X7:
Year price R&D Discontinuation Net profit
2006 Time wrap2 180 36% No 9,607,363

Time wrap3 200 38% No 5,319,226
2007 Time wrap2 162 39% No 47,134,536
Time wrap3 180 40% No 33,134,541
2008 Time wrap2 154 44% No 123,534,837
Time wrap3 180 58% No 75,127,816
2009 Time wrap2 200 62% No 185,210,975
Time wrap 3 250 70% No 79,122,225

The CVP Simulation using the above data will be as follows:
X5:
2006:
Price $ 229.00

Volume 2,720,013

Sales Revenue $ 622,883,054.19

ROS 26.76%
2007:
Price $ 228.00

Volume 861,296

Sales Revenue $ 196,375,469.86

ROS 0.30%
X6:
2006:
Price $ 482.00

Volume 621,527

Sales Revenue $ 299,575,792.73

ROS 45.25%
2007:
Price $ 500.00

Volume 612,256

Sales Revenue $ 306,127,784.72

ROS 46.91%

2008:
Price $ 700.00

Volume 216,366

Sales Revenue $ 151,456,447.50

ROS 28.24%

2009:
Price $ 650.00

Volume 276,744

Sales Revenue $ 179,883,550.29

ROS 36.21%
X7:
2006:
Price $ 200.00

Volume 1,381,987

Sales Revenue $ 276,397,420.00

ROS 1.92%

2007:
Price $ 180.00

Volume 2,778,364

Sales Revenue $ 500,105,434.50

ROS 6.63%

2008:
Price $ 200.00

Volume 2,625,464

Sales Revenue $ 525,092,720.00

ROS 14.31%

2009:
Price $ 250.00

Volume 1,482,929

Sales Revenue $ 370,732,329.55

ROS 21.34%

3. Discussion:
The above tables clearly demonstrate the outcome of the decisions made during the four year period and indicate the strategic alignment as applied by the company. Management was able to identify the potential that x7 had and despite staring off badly in the market the product had the highest market share.The firm therefore embarked on a growth strategy to ensure that the brand covers a larger market share. In this regard, more funds were invested in research and development reengineers the product. The firm therefore started with low pricing to attract the customers as they also improve the product. From the table above the brand was a major success as its profitability increased from just 7 million to more than 79 million within the four years. (Hirschey, 2009).X5 on the other hand had so attained its maturity stage and a price reduction in 2006 led to full market saturation. The following years saw the product record negative results but due to other non-financial reasons like brand, equity and company image the product was retained until 2008.x6 had been the star product for the high-income customers due to its high quality and hence the firm continued to leverage on that by charging high price. This did not affect the product as it continued to record high profits from 2006 to 2009.The product however reached its maturity and with the revitalization of x7 at low price x6 became expensive and hence it started losing the market share. The product should also be discontinued in the next one year.
4. Conclusion:
The above project has really stressed on the importance of using Cost volume profit analysis to make decisions and the important relationship between volume profits and costs. As the firm increases the volume, the fixed costs associated research and development as well as operations remains constant and the firm will maximize on its profits. It also stresses on the importance of separating profits into fixed and variable components to realize cost minimization goals. A firm that reduces prices will normally attract high volumes of sale and hence pricing strategies play a major role in determining the competitiveness of the firm with regards to market share. Another important consideration has been the influence of the non-financial decision-making and as such, the company was able to maintain x5 for a long time not because of the economic gain but due to its equity and as a major attractive feature to the customers and this led to increased fortunes of x7.

References
Droms, G.W. & Wright, O.J. (2010). Finance and Accounting for Nonfinancial Managers:
All the basics you need to know.6th ed. New York: Basic Books.
Hirschey, M. (2009). Fundamentals of Managerial Economics.9th ed. Mason, OH :
Thomson/South-Western.
Lucey, T. (2003). Management Accounting.5th ed. London : Continuum.

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