Business Scenario
Time Warp 2 and CVP (Cost Volume Profit Analysis)
Travelling back, the time has made it critical to analyze the previous strategies with the aim of making a critical decision in relation to the three products (X5, X6, and X7). In this scenario, it is ideal to adopt and implement the concept of a different method in the form of Cost volume profit analysis. Cost Volume Profit analysis proves to be a critical tool in the process of making vital decisions for the future. It is critical also towards the development of quality decision to tackle market and consumer needs in the context of the products thus essential to the strategic management of the business entity. The CVP analysis adopts the concept of determination of the relationship among the cost, volume, and profit levels during the implementation period. The main advantage of the adoption and application of the concept of the cost volume and profit analysis is the essence of enabling the business entity to make vital decision at the beginning of the warp year thus saving the organization the task of making strategic decisions at the beginning of each year (Avis, 2009).
The application of the CVP analysis take numerous and unique forms in relation to the needs and preferences of the organization in the context. Some of the forms of the implementation of the cost-volume-profit analysis include calculation of the breakeven point, development of the crucial price necessary for the achievement of particular levels of profits, and examination of the units of the products in a context that must undergo effective transaction to develop the objective profit level (Wilks, 2006). Since the focus in the analysis of this scenario is to develop an effective strategy better than the previous decisions, it is ideal to focus on the development of an adequate four-year plan to enhance the achievement of the profit levels of above the existing $ 954, 830, 241 from the years 2012 to 2015. The focus of this analysis will aim to achieve profit levels of about $ 1,000,000,000 with the aim of registering further celebration from the shareholders of the organization charged with production and distribution of the three crucial products in this analysis.
Cost-Volume-Profit Assumptions
Prior to the execution of the analysis of the time warp 2, it is critical to determine the assumptions of the cost-volume-profit analysis. The development and application of the cost-volume-profit analysis depends on the following critical assumptions (Wilks, 2006)
- Variations in the context of the revenues and cost levels develop in relation to the alteration of the number of the products under production and transactions within the market
- There is the opportunity to divide total cost into fixed cost and variable costs while paying attention to the volume of output by the relevant organization
- Upon graphical representation, the behavior of the total revenues and the overall costs proves to be linear in close examination with reference to the units within the stated time-frame
- In the analysis, it is ideal to have an idea of the unit-selling price, variable cost per unit, and the fixed costs for the relevant products. These values must also be constant for the stated period of analysis thus crucial to the application in this scenario.
- The analysis has to adopt and implement either single product examination or multiple sale of the product
- The other assumption relates to the ability and capacity to add the costs and revenues and their comparison regardless of the time value of the financial resource (money)
- Net income is equivalent to income taxes subtracted from the operating income in relation to the stated period
Profit Allocation
The time warp 2 decides to allocate the estimated or objective profit of about $ 1,000,000,000 for the span of the four critical years (2012, 2013, 2014, and 2015). The strategy allocated the estimated profit levels as follows.
| Products | 2012 | 2013 | 2014 | 2015 |
| X5 | $ 100,000,000 | $ 100,000,000 | Discontinuation | Discontinuation |
| X6 | $ 200,000,000 | $ 250,000,000 | $ 100,000,000 | $ 100,000,000 |
| X7 | $ 5,000,000 | $ 20,000,000 | $ 20,000,000 | $ 25,000,000 |
Product X5
From the available information, it is ideal to note that the product has been in the market for three years thus facing the aspect of maturity in relation to its availability to the consumers. It is also critical to note that the product is sensitive with reference to its pricing system. This indicates that reduction on the prices of the product in question will lead to rapid increase in the units or volume of sales. The strategy in the previous warp opted for the reduction of the price of the commodity a little bit with the aim of registering increase in the volume of sales thus the achievement of the profit allocation. The next step following the allocation of the strategy in relation to the reduction of pricing system requires the analysis to put the values of the price, target profit, and R&D allocations on the Cost-Volume-Profit calculator with the aim of obtaining the required units of transactions crucial to the achievement of the estimated profit levels. This strategy is application in the second year while inappropriate for the third year because of the achievement of the maturity stage thus unprofitable in the approaching years. It is ideal to note that the units sales vital for the achievement of the estimated profit levels of about $ 100,000,000 at the cost of $ 245 per unit and total allocation of the R&D is approximately 1,676,190 transaction units. This is achievable through application of two methods: direct division of the overall revenues by the unit cost of the product and critical division of the overall fixed costs and profit levels by the relevant contribution of the margin per unit (Blocher, 2005).
Product X6
Unlike the previous product, the product X6 has been in the market for about 2 years in relation to the available information. Another differentiation from the previous product is the sensitivity of consumers in handling of this product. The consumers are attached to the quality considerations of the product X6 prior to the critical decision on whether to purchase the product in the satisfaction of their needs. In order to enhance the quality and standards of the product, it is ideal to increase the level of allocation of the R&D percentage. This will woo consumer in the act of purchasing the product thus the opportunity to increase the vole of sales. Increase in the R&D allocation will result in increment of the cost of production or operations thus the need to improve the revenue levels within the market. It is critical to increase the level of prices a little to enable the organization benefit in relation to the volume of investment made in the adoption and implementation of the strategy. The value of the estimated profit for the product X6 is high because of the position of the product in the context of the product life cycle. The product is soon attaining maturity thus highly developed in the market to address the issue of the achievement of the final goal in relation to profitability levels. It has the opportunity and capacity to attract numerous consumers following the advancements in relation to its development and allocation of the R&D in percentage (Blocher, 2005).
Product X7
According to available information or data, this product is the newest in the market in comparison to the previous discussed products by the organization. Due to its position within the product lifecycle, it is ideal to note sensitivity in relation to the price levels and quality or standards of the products. This indicates that consumers focus on the quality and the prices before making vita decision in relation to the purchasing act in the market depending on the availability. Prior to the first and the second time warp strategy, the product in question registered a net loss. Following application of the time warp 1 and 2 strategies, it is ideal to note the registration of the net profit by the organization in the context of this product. This is crucial towards the development of the next strategy that would be ideal for the business entity for a period of four years. This is because effective application of this strategy in relation to the new product in the market will provide the organization with the opportunity to increase the level of the profits before deciding to increase the volume of allocation of the R&D when the product hit its maturity stage. The increase in the volume of R&D allocation following the attainment of the maturity will lead to the increment in the price levels to sustain the improved cost of product and distribution of the product. The organization should adopt the strategy that aims to increase the profitability gradually as the product matures within the market (Livingstone, 2002).
Conclusion
From this illustration, it is ideal to note that the cost-volume-profit analysis is essential and beneficial during the making of critical decision regarding the organization. Like in this scenario, the organization has the opportunity to make valid decisions for all the four years from 2012 to 2015. This offers the opportunity for the organization to focus on the effective application of these decisions (Kimmel, 2011). It is also possible for the analysis to determine the volume necessary for the achievement of the projected or estimated profitability levels at the end of the four-your strategic plan. This is vital for the modification of the production processes with the aim of meeting the estimated profitability levels. Effective application of this strategy will offer crucial benefit to the organization by increase the level of profitability thus the opportunity to celebrate further.
References
Wilks, C., Burke, L., & Chartered Institute of Management Accountants. (2006). Management accounting: Decision management : managerial level. Oxford: CIMA.
Avis, J., & Chartered Institute of Management Accountants. (2009). P2 – Performance management. Oxford, U.K: CIMA/Elsevier.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Accounting: Tools for business decision making. Hoboken, N.J: Wiley.
Livingstone, J. L. (2002). The Portable MBA in Finance and Accounting, Third Edition. New York: John Wiley & Sons.
Blocher, E. (2005). Cost management: A strategic emphasis. Boston: McGraw-Hill/Irwin.
