Business Scenario Report
Introduction and Background to the Report
At the beginning of 2012, an analysis of Clipboard Tablet Corporation’s performance in 2011 reveals that the company did not perform well in the market. The company is selling three tablets X5, X6, and X7, which raised a cumulative score of 81,571,138 by the end of 2011. At the time, X5 costs more than most of the tablets in within its category in the market, and was in its growth phase in the product life cycle in 2011. Meanwhile, tablet X6 is performing better than competing tablets within its category. On the other hand, tablet X7 had poor performance given that it was at its development phase in the product life cycle. The three tablets had barely penetrated their markets as tablet X5 had a 15% market share, tablet X6 had 6%, while tablet X7 had a 2% market share.
Strategy 2012 and CVP Analysis Improvements
Following these results, I decided to take on marketing and research & development strategy to improve the performance of the company and products over the next 4 years. The strategy made use of pricing strategies, along with allocations to research and development. In the process, the strategy failed in 2012 since it realized a loss of -72% in profits for product X7, which reduced the total profit margin for the company. However, the profit margins for tablet X6 increased from 16% to 25%, with market shares increasing.
It is then decided to make use of the Cost-Volume-Profit (CVP) analysis method to estimate the future costs, revenues, and profits for the three products to improve the performance of the company. In theory, the CVP tool is vital in the avoidance of losses like the -72% profit for product X7 seen in the pricing strategy. The tool is also necessary for it will assist in mapping out the target profits, monitor the performance of the company over the five-year period, and make future plans. With the financial results of 2011, the CVP analysis calculated the Profit for individual products as the “Total Revenue Minus Total Costs,” identified as 25,2942,298 for X5 and 37,579,840 for X6. These figures were realized from the profit equation and the contribution margin given by “Total Revenues Minus Total Variable Costs.” These were then used to calculate the expected quantity of tablets required to be sold in 2012, reach the target profit level. The quantity of tablets to be sold was based on the CVP analysis equation for units that assumes that fixed costs are a constant, as seen in equation 1 below.
In the equation F represents the “Total Fixed Costs,” Profit is the Total revenues minus total costs, P is the selling price per unit, V is the variable cost per unit, and Q is the required units to meet target profit. The calculation showed that by the end of 2012, Clipboard Tablet Corporation was expected to sell 2429202.207 units of tablet X5 and 484386.0645 of tablet X6 to reach its target profit. Therefore, these units sold at a selling price of $285 for X5 and $430 for X6 generated a revenue of $692,322,629 and $20,828,6007.7for X5 and X6 respectively. Following the CVP analysis for units, the strategy sold more units in 2012, as compared to the pricing strategy in SLP2 that realized a sales volume of 1,301,944 for product X5 and 1,563,272 for X6. The CVP analysis for units reached higher sales records of 2429202.207 units of tablet X5 and 484386.0645 of tablet X6. The profit margin for the CVP analysis was $496,592,885 for X5 and $8,636,508 for X6 resulting in a total profit of $505,229,394 profit higher than the cumulative profit of $321,582,769 by the strategy in assignment SLP2.
Strategy for 2013 and CVP Analysis
It was decided to make an estimate of the variable cost, selling price per unit, total fixed cost, and target profit for product X7 to identify the target units to be sold in 2013, as a re-launch in the market. With the assistance of the CVP analysis, several adjustments were made to the business strategy using the estimates calculated by the tool.
First for product X7 that did not perform in 2011 and had a loss of 72% in 2012, a target revenue of 335,678,550 was made at the beginning of 2013. This was to be raised by selling 2,337,328.54 units at a price of $180, which inevitably raised $420,719,137 in revenues and resulted in a profit of $363,079,940 by the end of 2013. For product X5, the quantity of units calculated were 2623550.214, at a price of $310, making a revenue of $813,300,566.4 and a profit of $581,132,789. Mean while, for product X6, the CVP calculated units were 279615.2024. It was realized that the CVP had calculated fewer units for X6 probably since the product was at its shakeout stage, where few first time consumers were buying. To realize a profit with this small sales volume implies led me to reduce the resources allocated to research and development in order to reduce the total cost in 2012 by 10%. This decision led to a calculated revenue from product X6 of $114,642,233 and total costs of $20,449,336 less by 10% from 2012, to realize a profit of $94,192,897. The profit from product X6 in 2013 is higher than that of 2012, which was an increase of 90.83%. It is evident from the calculated results of 2013 that the CVP analysis is useful in assisting management to make decisions on which products to increase sales, reduce cost of production and marketing to realize a profit.
This analysis finds that the results of 2013 for the CVP analysis realized a total profit of $1,038,405,627, which is higher than $727,466,450 realized in 2013 in the pricing strategy of assignment SLP2. Based on the CVP strategy, the market share for the products also changed drastically. The CVP analysis tool led to sales volume for product X5 of 2,429,202.207, X6 for 484,386.0645, and zero for X7 in 2012. These changed to 2,623,550.214 for X5, 279615.2024 for X6, and 2,337,328.54 for X7 in 2013. The sales volumes for the CVP were high for X5 in 2012 by 511,473,207, but lower in 2013. The sales volume for product X6 were lower for both products in 2012 and 2013, indicating a need to review the marketing strategy of the product. Though product X6 received a higher profit, the profit is the result of a reduction of the total cost of the product by 10%. However, sales for product X6 continually reduce, indicating a smaller market saturation of 2%. At this rate, though the product is creating profit, it is decided to discard it since the market share is too low to support the cost of the product. Product X7 received a higher sales volume of 2,337,328.54 through the CVP analysis, as compared to 481,538 of the pricing strategy of SLP2 in 2013.
Strategy 2014 and CVP analysis
Based on the results of 2013, it is decided to drop product X6 since it is making a loss when the strategy maintains the total costs, but makes a profit after a reduction of costs. From the calculations of the CVP analysis for product X5 calculated a quantity of 3507430.148 of the product to create a revenue of $1,104,840,497 in 2014, at a price of $315, and a profit of $846,605,562. For product X7, 2621731.518 units were sold by the end of 2014, at a price of $180, creating revenue of $471,911,673.2 and a profit of $404,866,323. The profits for X5 in 2014 are higher than $111,438,429, the profit made in the previous strategy SLP2. The profits made by X7 are higher in 2014 with the CVP tool as compared to the profit of $1,856,769 made in the pricing strategy in SLP2. With the CVP analysis it is also easy to adjust the costs of the products, through adjustments to the variable costs. The tool in 2014 created higher sales volume for products X5 and X7 with higher profits at the same price. In this approach, product X6 was dropped while the total costs for products X5 and X7 reduced by close to 10% by reducing the variable cost.
Strategy 2015 and CVP analysis
In the previous strategy alterations to prices through consumer- and competitor-based pricing strategies led to drastic decline in sales of product X5, the maturation of product X6, and a slow rise of X7. Following the results of 2014, it is decided to reduce the cost to research and development of product on products X5 and X7, reducing the total costs by more than 30%. The CVP analysis showed that by the end of 2015 the company is able to increase its market share with the two products as 4,299,027 units of X5 are sold and 3,009,809 units of X7 are sold. The strategy is useful for its brings product X5 to the shakeout phase and X7 to the growth stage in the product lifecycle. The calculations lead to better management decisions that see an increase in the amount of revenue raised by product X5 to $1,354,193,708 and $541,765,600 from product X7. The profits also increase to $1,129,109,141 for X5 and $457,339,010 for X7.
Therefore, for year 2016, it is evident from the CVP analysis that there is a need to increase the sales volume of X7, and maintaining those of X5 while increasing the repeat consumers for X5. To achieve this, the CVP analysis can be used to calculate the expected number of units for each product needed to be sold in 2016 to meet the expected target profit.
CVP Analysis for Units
| CVP analysis | Year 2011/2012 | ||
| X5 | X6 | X7 | |
| total revenues 2011 | 276159075 | 242073200 | 0 |
| total costs 2011 | 23216777 | 204493360 | 0 |
| PROFIT | 252942298 | 37579840 | 0 |
| F-Total Fixed costs | 75000000 | 37500000 | 0 |
| P-Selling price per unit | 285 | 430 | 190 |
| V-variable cost per unit | 150 | 275 | 0 |
| Q-Units required to obtain target profit | 2429202.207 | 484386.0645 | 0 |
| selling price in 2012 | 300 | 440 | 190 |
| revenues in 2012 | 728760662.2 | 213129868.4 | 0 |
| total costs in 2012 | 232,167,777 | 204,493,360 | 0 |
| Total Profit Received in 2012 | 496,592,885 | 8,636,508 | 0 |
CHART 1: CVP ANALYSIS FOR 2012
| Year 2012/2013 | |||
| X5 | X6 | X7 | |
| total revenues 2011 | 728760662.2 | 213129868.4 | 335,678,550 |
| total costs 2011 | 232,167,777 | 204493360 | 57,639,197 |
| PROFIT | 496592885.2 | 8636508.4 | 278039353 |
| F-Total Fixed costs | 75000000 | 37500000 | 37,500,000 |
| P-Selling price per unit | 300 | 440 | 190 |
| V-variable cost per unit | 82.13 | 275.00 | 55 |
| Q-Units required to obtain target profit | 2623550.214 | 279615.2024 | 2337328.541 |
| selling price in 2012 | 310 | 410 | 180 |
| revenues in 2012 | 813300566.4 | 114642233 | 420719137.3 |
| total costs in 2012 | 232,167,777 | 20,449,336 | 57,639,197 |
| Total Profit Received in 2012 | 581,132,789 | 94,192,897 | 363,079,940 |
CHART 2: CVP ANALYSIS FOR 2013
| X5 | X6 | X7 | |
| total revenues 2011 | 813300566.4 | 0 | 420719137 |
| total costs 2011 | 25823493 | 0 | 6704535 |
| PROFIT | 787477073.4 | 0 | 414014602 |
| F-Total Fixed costs | 75000000 | 0 | 37500000 |
| P-Selling price per unit | 315 | 0 | 180 |
| V-variable cost per unit | 69.1 | 0 | 7.78 |
| Q-Units required to obtain target profit | 3507430.148 | 2621731.518 | |
| selling price in 2012 | 315 | 180 | |
| revenues in 2012 | 1104840497 | 0 | 471911673.2 |
| total costs in 2012 | 258,234,935 | 67,045,350 | |
| Total Profit Received in 2012 | 846,605,562 | 0 | 404,866,323 |
CHART 3: CVP ANALYSIS FOR 2014
| X5 | X7 | |
| total revenues 2011 | 1,104,840,497 | 471,911,673 |
| total costs 2011 | 2,250,845 | 844,265 |
| PROFIT | 1102589652 | 471067408 |
| F-Total Fixed costs | 75000000 | 37500000 |
| P-Selling price per unit | 315 | 180 |
| V-variable cost per unit | 41.08 | 11.03 |
| Q-Units required to obtain target profit | 4299027.643 | 3009808.889 |
| selling price in 2012 | 315 | 180 |
| revenues in 2012 | 1354193708 | 541765600 |
| total costs in 2012 | 225,084,567 | 84,426,590 |
| Total Profit Received in 2012 | 1,129,109,141 | 457,339,010 |
CHART 4: CVP ANALYSIS FOR 2015
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