Cost-Volume-Profit Assessment and Business Analysis

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There are two different scenarios that need to be tested. The first scenario has the $170 selling price and fixed costs of $20 million. Using these inputs, the first step is to calculate the estimated profit under each scenario. Demand Price VC FC Profit Probability 150000 170 4500000 20000000 1000000 0.25 250000 180000 170 5400000 20000000 5200000 0.5 2600000 200000 170 6000000 20000000 8000000 0.25 2000000 4850000 Est. Profit The second scenario has fixed costs of $25 million, but a higher selling price of $200. These changes need to be made to the calculation. The demand and probabilities do not change, nor does the variable cost associated with producing the good. Under the second strategy, the results are as follows: Demand Price VC FC Profit Probability 150000 200 4500000 25000000 500000 0.25 125000 180000 200 5400000 25000000 5600000 0.5 2800000 200000 200 6000000 25000000 9000000 0.25 2250000 5175000 Est. Profit This analysis shows that the second strategy has the higher expected profit. Under either scenario, there is a 75% chance that the company will achieve the $4 million target profit. When demand is 150,000, then the profit is going to be below the $4 million mark in either case. There is a 25% that the demand will be 150,000. There is a 75% chance that the demand is going to be 180,000 or higher. At 180,000 or higher, the company would generate a profit in excess of $4 million under either scenario. Therefore, there is a 75% chance that the company is

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