¶ … warp!
Having examined the performance of Joe Schmoe, it is believed that some attention to the fundamental principles of cost-volume profit analysis and to the product life cycle will immediately allow Clipboard Tablet Co. To perform better, since it is getting the chance to re-do history. This paper will outline the basic strategies, along with their outcomes, and an analysis of why these strategies delivered better (or worse, as the case may be) performance vs. that of Joe Schmoe.
Theory
There are six decisions to be made each year. These are the percentages allocated to R&D and the price for each product. First, the price. For any given price, there will be a pricing curve that determines how much of a product will be sold, given a certain price. In general, the higher the price, the lower the volume of sales, and vice versa. The key concept here is price elasticity of demand, which is the rate of change in demand given a certain change in price. We do not know this elasticity at present, because Joe Schmoe never changed the prices. But we can assume from the three products that they will have different price elasticities. The X7 has a starting price of $190 and the X6 has a starting price of $430. This means that the X7 is likely to be a more basic product, attracting a more price conscious audience. The X6, on the other hand, it probably a more feature-packed product, and those features are probably what is attractive about the product.
Thus, as a basic, logical starting point, the X7 probably needs to have its price reduced. This is basic pricing theory. As a new product on the market, the X7 has a very low installed base. But the senior marketing team has estimated that it has a very large potential market of 17,500,000 customers. It is worth noting that the X5 and X6 have only a potential market of 6,000,000 customers each, and they have already sold to some of them. Logically, the X7 needs to have a policy of low price-high volume in order to generate the highest level of profitability. The fixed costs are going to exist for each year, if we assume that the X7 will not be cut. Thus, the strategy that optimizes the contribution to fixed costs is the one that will deliver the best results. The closer we can get the sales volume to that 17,500,000 figure, the better the overall bottom line is going to be. Thus, a lower price is needed. But we also need to calculate the elasticity on the X7, because once we have that, we can estimate the slope of the demand line, which is an essential part of the cost-volume-profit analysis. A wild card is how much R&D matters to this product. It needs to be competitive in R&D, and will be peaking in the product life cycle when the other two are on their way out, so maybe initially the R&D can remain at a lower level, but it should rise later on.
The X6 consumer loves features, and maybe has a lower degree of price sensitivity. Because of where this product is in the product life cycle, there is reason to believe that all 6 million customers can be reached within the next few years, something that will deliver the greatest contribution to the fixed costs. Pricing should reflect a balance between the margins that the company can earn, and ensuring that volume is maxed out. But volume is also dependent on the R&D expense. With this product, keeping up the R&D is going to be important, so it should receive investment until it reaches the decline part of the life cycle.
The X5 is furthest along in the product life cycle. Investment in R&D for this product is less likely to yield dividends as it is expected that the product will, more or less, reach its 6 million sales target. A wildcard element with the X5 is that it has the highest fixed costs of the three products. The fixed costs are $75 million for this product, double that of the X6. As such, there is a threshold at which, during the decline stage of the life cycle, the X5 is not going to be viable. Joe Schmoe lost money on this product in the final year, so we are going to watch out and try not to make that same mistake. As far as pricing is concerned, the X5 seems mostly priced appropriately, but may benefit from a slight price reduction to ensure that the 6 million mark is reached in time to cut the product for the last year.
2012
With the above strategies in mind, the following decisions were made in 2012, with the following results:
2012
X5
X6
X7
Total
Price
R&D
33
34
33
Profit
-20.472
Saturation
27
16
2
2013
In this year, the process of feeding R&D funds into the X6 and X7 began, with prices remaining the same. The results were as follows:
2013
X5
X6
X7
Total
Price
R&D
10
45
45
Profit
-8.014
Saturation
52
32
3
2014
The X5 will have the minimum 1% R&D expense, and will also have a price cut to spur sales. The X7 will also have a price cut to spur sales. The results are as follows:
2014
X5
X6
X7
Total
Price
R&D
1
50
49
Profit
97.222
31.604
Saturation
84
58
5
2015
The last year was a bit frustrating. At this point, the X5 is going to be continued but we are worried that it will lose money. It should still be profitable, but only barely. The X7 needs to have a big year this year in order to meet our goals. The results were as follows:
2015
X5
X6
X7
Total
Price
R&D
1
50
49
Profit
-17.955
93.142
Saturation
88
9
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