AOK Play pricing and profitability analysis across three scenarios
This financial and management accounting paper answers several questions regarding the Electronic Products and Accessories Company. The questions answered by the paper include the selling price of the AOK Play product, the fixed cost, the total cost per unit as well as the contribution margin. In addition, the expected profits and breakeven points for the company's proposals are also calculated. Moreover, the recommended proposal is highlighted and the reasons for its selection are given as well as additional issues to be considered before making the final decisions.
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Financial & Management Accounting
Selling price of the AOK Play
Contribution per unit = Selling price per unit -- variable cost per unit
total variable cost (= total cost -- total fixed costs) / sales
(3,600,000 -- 2,100,000) / 80,000
(1,500,000 / 80,000)
Selling price = $50 per unit
Fixed cost per unit
Fixed cost per unit = total fixed costs / sales
= 2,100,000 / 80,000
= $26.25per unit
Total cost per unit
Total cost = total variable cost + total fixed costs
= 18.75 x 80,000 + 2,100,000
= 1,500,000 + 2,100,000
= 3,600,000
Cost per unit = total cost / sales
= 3,600,000 / 80,000
= $45per unit
Contribution margin
Contribution margin per unit = total contribution / sales
= 2,500,000 / 80,000
= $31.25per unit
Question 2
Expected Profits and Breakeven
Preliminary Projections
Breakeven = total fixed costs / contribution per unit
= 2,100,000 /
= 67,200
For this projection, the company should sell 67,200 product units before breaking even. This means that for the company to realize any profit, the stipulated number of products must be sold first. For this projection the profit the company will realize is the remaining units' sales. Selling the remaining product units is the company's profit. The profit thus = remaining units x selling price = (80,000 -- 67,200) x 50 = $640,000. Therefore this projection will give the company this profit margin.
Production Manager's Proposal
The production manager proposes a selling price of $45 which would increase sales by 25% putting the sales at 100,000 units. He further states this would increase fixed production overhead by 50,000 and fixed marketing overhead by 25,000.
This would increase fixed costs by 75,000 resulting to fixed costs of (2,100,000 + 75,000) 2,175,000.
Variable costs per unit = 18.75
Selling price per unit = 45
Contribution per unit = selling price -- variable costs
= 45 -- 18.75
= 26.25
Breakeven = total fixed costs / contribution per unit
= 2,175,000 / 26.25
= 82,857
According to this projection, the must sell 82,857 units before breaking even. Though the number of product unit before earning any profit is high, this projection will give the company a gross profit of (remaining units x selling price) = (100,000 -- 82,857 x 45) = (17,143 x 45) = $771,435 for the company. This proposal would result in higher profits than the company's preliminary projection.
Question 4
All the proposals issued would result in profits for the company. But there are issued that are looked before recommending any proposal to the company's chief executive officer. Increasing the prices can affect the market reception of the product while underpricing can reduce profit though increasing sales. The company requires a proposal that would not increase production costs while at the same time increasing sales as well as profit margins. For this reason, George would recommend the head of marketing and sales proposal to the chief executive of the company.
The head of Marketing and sales proposes the selling be increased by 10%. This would increase sales to 90,000 units. Besides, this would increase marketing overhead by $25,000 and fixed production overhead by $20,000. This proposal would bring the fixed costs to (2,100,000 + 45,000) = 2,145,000. The selling price would be $55.
Variable costs per unit = 18.75
Selling price per unit = 55
Contribution per unit = selling price -- variable costs
= 55 -- 18.75
= 36.25
Breakeven = total fixed costs / contribution per unit
= 2,145,000 / 36.25
= 59,172
The breakeven for this proposal is the lowest. This proposal speculates that the company should sell 59,172 product units before realizing any substantial profit. The company would earn a gross profit of (remaining units x selling price) = (90,000 -- 59,172 x 55) = (30,828 x 55) = $1,695,540 for the company. This proposal would result in the highest profit margin than the company's preliminary projection as well as production manager's decision. This would give the company a greater market share while making the company incur low production expenses.
Question 5
Issues to Consider before Implementing Proposal
The company should focus on operational factors before implementation the proposal. Timelines for the production should be created and the team charged with the responsibility chosen. In addition, the management should allocate time for the development of all materials and support activities necessary for the successful implementation of the proposal.
The other factor should be considered is the market competition. The company should determine the market competition, competitors and their pricing policies. This would ensure the company does not overprice or underprice the AOK Play product when it eventually comes to the market.
The company's growth factor should also be considered. The company should see the product's growth timeline and initiate objectives and goals to ensure the product still remains competitive once it comes to the market. The other factor to be considered is marketing. The price should be fair to the market, the advertisement and product branding different from other competitors to increase profit margins and market share.
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