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CVP Analysis Last time, strategies were developed for the different products, the X5, X6 and X7. The strategies were based on cost-volume-profit analysis, the product life cycle and different pricing strategies. This report will highlight the results of those strategies, and explain why they occurred, based on the underlying theories. The X5 analysis showed that increasing the price would deliver lower sales volume, but higher overall profit. The same showed for the X6. With the X7 there was maybe not as much data. The elasticity was not known.

But we do know the following about the X7: It is a low-priced good that was not selling well at $195. Thus, it stands to reason, even without knowing the elasticities, that the X7 will benefit from a lower selling price.

The tactics are therefore Year by Year Decisions: Pricing & R&D Allocations PRODUCT DECISION 2011 2012 2013 2014 2015 X5 Price $285 $280 $280 $280 R&D % 33% 0% 0% 0% 0% Discontinue? NO NO NO NO YES X6 Price $420 $441 $441 $441 $441 R&D % 34% 40% 40% 40% 0% Discontinue? NO NO NO NO NO X7 Price $195 $165 $165 $165 $165 R&D % 33% 60% 60% 60% Discontinue? NO NO NO NO NO Report on Results Cumulative Profit 2011 $81,571,138 2012 $361,796,857 2013 $849,408,401 2014 $1,372,679,239 2015 $1,612,592,251 The table above shows that the organization fared better under the new calculations. There are a few different explanations for this.

In 2012 and 2013, the X5 and X6 were at growth stages of the product life cycle and were the major drivers of profit. The X7 was actually losing money in these years -- more on that later. But the X5 continued until 2014, and it was profitable the entire way, which is what was predicted. The cost-volume-profit analysis showed that increasing the price would probably deliver a much higher profit than before.

While a higher price would mean that slightly fewer units would be sold, the higher selling price would make up for that. The result is that by the 2014-year, the last one of selling the X5, it would still be profitable. Indeed, that was the case. The product had 93% of saturation, which is an indicator that a few sales were left on the table, but the profit of $132,844,724 in the 2014-year showed that the company was getting the highest revenue out of this product.

The fact that this was one without any R&D investment shows that the product is, based on its attributes and positioning in the market, a compelling proposition for consumers. With low elasticity, the CVP analysis correctly showed that increasing the price would increase the profit. This product continued to be a profit driver. The scenario takes us through the peak earning years of this product, to the maturity stage of the product life cycle.

Therefore, strong sales are expected, especially if the product is supported by R&D investments. The CVP analysis showed that consumers had a fairly low elasticity for this product, and therefore an increase in price would deliver an increase in profits. The price of $441 appeared to have precisely this effect. By 2015, the X6 has reached 92% saturation, and had a profit of $159,126,896. It is likely that if we are going into 2016, that this product will be cut from the lineup.

What this means is that the behavior with respect to this product is basically the same as with the X5, where increasing the price is going to increase the profits, at least to a certain point. You want to increase sales, but there is a constraint on sales. By the time we get to 92% saturation, the product is in decline and will not cover fixed costs. So the objective was to increase the price, and get as much profit out of this product before the end of 2015.

That is what we have done, and it seems to have worked in this scenario. The X7 was the product where we changed our strategy at the last minute. Our prior analysis had indicated that lowering the price made sense, since the demand for the X7 was poor at the $195 price. The problem is that we did not have any elasticity figure to work with, so there was not much certainty with the number.

But there was the sense that the price elasticity for this product meant that if we dropped the price far enough we could spur a spike in sales. So we changed it up -- we were initially thinking $195 with a drop to $185, but decided to get more aggressive, drop it to $165 the whole way through and investigate these elasticities. The result was fairly successful. The X7 still lost money in 2012 and 2013, but turned to profitability after that.

In 2015, the X7 earned $80,786, 116 in profit and had increased up to 9% share in the market. What is interesting is that the elasticities show that the X7 would probably benefit from being even cheaper. The fixed costs are $65 per unit, which is pretty low. So that leaves a lot of flexibility to drop the price even lower. We also now have some more numbers to work with. I would think that to do this again, we would have to consider going even lower on the X7 in order to be successful.

Comparison and Lessons The latest performance was better than the last performance. That prior performance saw prices lowered in order to drive sales, and while that is what occurred, those sales came at the expense of profits. One of the main benefits of cost-volume-profit analysis is that it illustrates the relationship between volume and profit. You can increase sales volume, but that does not necessarily mean that you are increasing profit. When the results of these two exercises are compared, that relationship is easier to see.

Even with lower volumes on the X5 and X6, the profits were higher. What this exercise also highlights is the value of gathering data. The more data that we were able to gather, the better informed our decisions were. With better data, we will be able to perform better, should something like this happen again. Indeed, as we go into 2016, the company now only has one product. We know from this experience that lowering the price of the X7 wins more sales, and more.