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In this case, we have a base logic for R&D allocations -- the X6 needs to be feature-rich in order to attract buyers. The X7 needs only to be current in its features. The X5 is more or less locked into a particular sales, revenue and profit trajectory. Adjustments made at this point in the product life cycle may impact total company profitability by a few million in either direction, but the real profit potential lies in the X6 and X7. Under Joe Schmoe the X6 had a contribution margin of $400 -- 250 = $150. I hypothesized that if the features were improved I could raise the price and therefore the contribution margin. I delivered a margin of $450 - $250 = $200 or $50 more contribution margin than the Schmoe strategy. This came at a cost of a $6.6 million increase to the R&D cost. In 2007 for example this equated to $8.50 per unit, meaning that I added $41.50 per unit to the net profit. This came at a slight reduction in sales. Schmoe sold 5.363 million units and I sold 5.298 million units. Thus, for the X6 Joe did $150 * 5.363 = $804.45 million in profit. I did $191.50 * 5.298 = $1,014.56 million in profit. This is because there is low price elasticity of demand on the X6, especially when its features are improved. The next strategy will build on that theory, testing the upper limits of profitability for the product. Using the price elasticity...
This can be found in Appendix A. The ideal price point for the X6 therefore is $432.
The CVP analysis also provides insight into the value of the X7. In this case, I made an initial decision to lower the price because I noticed that the contribution margin was the highest of the three products ($200 - $65 = $135 or 67.5%). This gave me flexibility to lower the price. The objective of this price reduction was volume. At $200, the X7 only sold 2 million units. At $150, it sold 4.932 million units. Thus, Joe Schmoe delivered 2 million * $135 = $270 million in profit and I delivered $85 & 4.932 = $419.22 million. There is still room to improve the total volume sold by the end of 2009 on the X7. We have a sense from Time Warp 1 what the price elasticity of demand might be for this product. If we use that information, we can estimate that the ideal price point to maximize profit of the X7 is around $137 (see Appendix B). It is the price elasticity of demand that gives the slope of the line determined by the price and the contribution margin. Any lower and the product will sell volume, but the lower profit per unit will result in decreased total profit. The $137 price point is simply an…
The above table indicates that the sales volume which is required in order to achieve a $100 M. profit at a price of $245 with an R&D investment of 30% is 1,676,190 units. This is calculated by dividing the total revenue accrued by the unit price. X6: The product X6 has been in the market for a total of 2 years. Unlike the product x5, the customers take great consideration of the
Profit Analysis and Costing for the 21st Century Value costing is about looking at the different aspects of a business paying particular attention to the opportunity cost they represent, how much they are likely to financially benefit a firm, and how much they are likely to cost it. Through this analysis, it is possible to determine the parts of the business that function the most efficiently and locate the parts
Managerial Accounting Cost-volume-profit analysis is a tool used in managerial accounting that helps companies to determine the level of production (and sales) required by the company to break even. In CVP analysis, costs are separated into fixed and variable costs. The assumption is that the fixed costs do not change, while the variable costs do change with the level of production. Once sales are taken into account, so are variable costs,
CVP is very useful for small business also because the analysis takes into consideration variables like Return on Investment, or Customer Acquisition Cost. This analysis allows the company to determine what the maximum profit volume can be, and how the above mentioned variables can be changed in order to become successful. CVP analysis is also able to determine the results of media campaigns, especially for small business, where results are more visible and can be observed after
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