Clipboard Tablet Sim Case Study

Length: 4 pages Subject: Economics Type: Case Study Paper: #34765043 Related Topics: The Time Machine, Fixed Costs, Life Cycle, Money
Excerpt from Case Study :

¶ … profit analysis was introduced, but the execution was lacking. One of the important factors is that CVP analysis requires a number of data points so that the elasticities of demand for the product can be determined. There is still going to be the wild card of R&D investment, but setting prices is an important determinant of demand. Working on theory rather than data last time, the results were perhaps less than stellar. The key, however, is to learn from the mistakes that we make and build a better company next time.

Underlying Theory

Last time out, the prevailing theory was that the X5 should be cheaper, the X6 more expensive and the X7 should be much cheaper. The X5 is going to sell out anyway, so whatever we do with that product is only going to make a few million in difference. Nevertheless, we know that the X5 has to be cancelled for the 2015-year, which means that we want to come as close to 100% saturation as possible in the first three years, and maximize profit.

The X6 was believed to have a relatively low price elasticity of demand. This product is the premium product in the range, and was therefore expected to sell at a premium price as long as we were able to invest enough in improving it to justify the higher price. R&D allocation is tricky in the sense that it is a fixed amount in total for the company, but the way it is allocated across product lines is going to dictate the sales that we can generate from our different products.

The X7 has a fairly low variable cost, and a high potential market of 17,500,000. The other products, by contrast, only have a potential sales of 6,000,000. If we consider what this means for total revenue, the potential remaining market beginning in 2012 for the three products, by revenue, at current price points is as follows:

Units Left

Price

Revenue

X5

4965000

1,415,025,000

X6

5450000

2,343,500,000

X7

17500000

3,325,000,000

What this shows is that the X6 and X7 are where the money is. We need to get the pricing right on these products. If some R&D needs to be sacrificed on the X5, it is probably far...

...

The opportunity cost of not investing in the X6 and X7 is going to be significant, based on how much revenue we left on the table with these products last time.

Time Warp Strategy

The strategy this time will focus on what we learned last time. We priced the X5 at $275, cut it to $265 and held on too long. This time, the price will be set at $270. This product will not receive any R&D, and will be cut prior to 2015. Because the X5 has the highest fixed costs of any product, it will be unable to cover those fixed costs in the 2015-year, at the end of its product life cycle.

The X6 was priced last time at $445 the entire way through the simulation. It experienced growth through the first three years, but faded in 2015. Our performance was higher than what was achieved by the Schmoe regime, but did not maximize sales. We still believe that a higher price will maximize profit, even if a few sales are sacrificed. Thus, a price of $440 will be utilized. The R&D for the X6 will need to be around the same -- it will sell close to capacity in the four years regardless.

The X7 will receive an aggressive strategy. We now have the data needed to determine a cost-volume-profit analysis. We know that the floor for pricing is the variable cost of $65. We know from the Joe Schmoe scenario and from our own analysis last year that the slope of the price/demand line is 38,252. This is the price elasticity of demand. This tells us that the point of revenue maximization is a price point of $108. However, we have the variable and fixed costs so we may as well input those. When we do, we arrive at a price point of maximum profit of $141, so that is the price point we will use. This assumes 67% R&D from the beginning.

Results

2012

X5

X6

X7

Total

Price

R&D

0

33

67

Profit

172682

153516

-25487

300711

Saturation

27

16

2

2013

X5

X6

X7

Total

Price

R&D

0

33

67

Profit

229097

270796

507208

Saturation

54

33

4

2014

X5

X6

X7

Total

Price

R&D

0

0

Profit

94792

317355

73087

485234

Saturation

86

59

7

2015

X5

X6

X7…

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