Introduction Time has warped again, which allows me an opportunity to utilize the cost, volume and profit analysis to develop a new plan for the next four years. The strategy is to maximize profit for the Clipboard Tablet Company for the next four years. After accessing the strategy from 2012-2015, we will calculate variable cost, variable cost per unit, contribution margin, contribution margin per unit, contribution margin ratio, break-even point in sales dollars and break-even point in units sold to fine tune our strategy. Below is the strategy matrix with the year-by-year decisions made based on price and R&D allocations.
Year by Year Decisions: Pricing & R&D Allocations 2012 2013 2014 2015
X5 Price - $275 Price -$275 Price - $275
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This strategy reduced the breakeven point for X5 and X7 by a little over 2 million dollar, while the X6 breakeven point increased a little over 11 million dollars. For 2013 to 2014, the no changes were made to the prices of the tablets, the R&D of the X5 was reduced by 5% and the X7 increased by 5% bringing the X5 to 5%, the X7 to 56% respectively. The impact of this move was the break-even point in units sold for X5 model with decrease of 9,600 from 619,200 to 609,600 and reversed effect for X7 model which increased by 10,000 from 414,500 to 424,500. For 2014 to 2015, the decision was made not to change the prices, but R&D was adjusted for the X6 to 15%, and the X7 increased to 85%. The X5 was discontinued due to its decline in the market. The breakeven point in units sold decreased for the X6, while the X7 increased.
Analysis of new strategy
Year by Year Decisions: Pricing & R&D Allocations 2012 2013 2014 2015
X5 Price - $280 Price -$280 Price - $280 Price - $280 R&D % - 0% R&D % - 0% R&D % - 0% R&D % - 0% Discontinue? No Discontinue? No Discontinue? No Discontinue? No
X6 Price - $450 Price - $450 Price - $450 Price $450 R&D % - 67% R&D % - 67% R&D % - 50% R&D % - 40% Discontinue? No Discontinue? No Discontinue? No Discontinue? No
X7 Price - $190 Price - $180 Price - $180 Price - $180 R&D % - 33% R&D % - 33% R&D % - 50% R&D % - 60% Discontinue? No Discontinue? No Discontinue? No
Assuming that the company’s goal is to maximize profits, the current cost system is not an appropriate tool for strategic planning. The ambiguity of the overhead costs per product makes it difficult to accurately analyze the cause and effect relationships of changes and/or improvements to specific product line.
We evaluated our company’s position in the industry, and found ourselves in an excellent starting position to further develop our products and match them to the industry’s needs. Our market share is adequate and we can advance further with our strategy improve and reposition our products in the coming years. We have underutilized capacity, which we intend to improve, while increasing automation to reduce costs. We have plans to improve our promotion to improve product awareness and with the appropriate product lines we will increase price to improve margins and better align our high-end product image. Our current financial position is optimistic, showing our leverage (Assets/Equity) at 2.0, when our goal is to maintain 1.5-2.0 overall. By utilizing the analysis tools we are learning what elements are driving demand, how to effectively tailor our products through R&D, how best to adjust our marketing and pricing, while lowering input costs, in order to improve margins and to ensure our stakeholders are all satisfied.
Breakeven Analysis for Product Tylenol Approach 1 - Same price as Tylenol Approach 2a - Cheaper than Tylenol Approach 2b - Cheaper w/lowered trade cost $ $ $ $ Unit Cost (Variable Cost) 0.60 0.60 0.60 0.60 Trade Cost (Selling Price to Retailers) $ 1.69 $ 1.69 $ 1.05 $ 0.70 Fixed Cost (Advertising) 2,000,000 6,000,000 6,000,000 6,000,000 Break-Even Quantity [Fixed Cost/(Trade Cost-Unit Cost)] 1,834,862 5,504,587 13,333,333 60,000,000 Contribution Margin (Unit) 64% 64% 43% 14%
Although the company did show an increased gross profit of $8,255,000 with $6,358,000 less Net Sales in 2013 versus 2012, that increase is due to the reduction in product Cost of Goods Sold by $14,613,000. Since increases in product price will negatively affect sales, one of management’s primary goals is to keep prices stable. This objective is achieved through implementation of cost cutting programs, investing in more efficient equipment, and automation of more steps in the production process.
Although the financial goal is to create profit, we need to calculate the breakeven point to get started.
After a few months of detailed scrutiny of the numbers, we were able to make pricing decisions more quickly by using the breakeven change in volume to set the new price. Based on our broad
Breakeven = £1 million/£25 = 40,000 subscriptions Given you need 40,000 subscriptions to breakeven, do you move forward?
Based on the Excel Problem of chapter one, if the total capacity for this business is 725 will you stay in it? If you want to stay in it what price you need to obtain a break even point of 725?
Break-even Dollar Volume = Total Fixed Costs / Contribution Margin = $525,000 / 0.7111 = $738,282.40
A major issue is since reducing the price 20% reduces the profit margin to 15%, to maintain the same profit while reducing the price, the sales must be $28 million for this year. This is an increase of 233% in one year to justify reducing the price this much. This is a highly unlikely target.
In the case study, as the annual fixed cost is $6,000,000 and the contribution margin per event is $1,900. Therefore, the breakeven point is at the 3,158
These objectives are reasonable. However, objectives should be specific and measurable. Some alternative objectives would be to focus the Company's resources toward achieving profitability by the fourth quarter of 2000 (an annual objective), and to increase profitability by 5 percent per year for the next 3 years (long-term objective). These objectives would give meaningful, measurable goals that management would need to obtain, or it would require management to re-evaluate the Company's objectives or the Company's strategy to achieve the objectives. With the aforementioned objectives in mind, the Companyneeds to implement a strategy to achieve the desired results. It is necessary to evaluate alternative strategies before selecting the actual strategy to implement. The SWOT or TOWS, SPACE, Grand Strategy, IE, and QSPM Matrices are tools to help in the evaluation and selection of alternative strategies. The matrices indicate that Amazon is in a strong competitive position, and that the Companyshould build and grow. The matrices indicate that, despite Amazon's financial position, the Companyhas some distinct competitive advantages in a high-growth or unstable industry. Some strategies for companies that fit this profile are backward, forward and horizontal integration, market penetration, market development, product development and joint venture. One strategy that would fit into
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The three tablets offered by this company were introduced to the market at different times. The price of X5 and X6 were $285 and $ 430 respectively. During the same period, X7 was the cheapest at $190 per unit. The sales of each tablet show the diminishing trend with the highest records registered during the year of introduction (Lee, 2006).This is a common phenomenon in the technology industry as research and innovation are employed.
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