SLP 4 - Handheld Corporation - Case Study Example

Submitted by: XXXXXXX Number: XXXXXX XXXXXX XXXXXX XXXXXX of XXXXXX XX – XX – 2010 SLP 4 - Handheld Corporation The strategy formulated in time warp 2 using the CVP (Cost Volume Profit) analysis is implemented in the years 2006 – 2009. The results are then presented to analyse the profit and performance of the products in this time warp. Based on this analysis, the pitfalls of the strategy are identified and recommendations are provided. The breakeven volume was identified for the products in the four years from the fixed costs and the unit contribution margin of each product (Samuels, Wilkes and Brayshaw). The revised strategy based on CVP analysis and the outcome from the same are presented in the following sections. Year 1 - 2006: In 2006, the CVP analysis indicated that reducing the price of X5 to $ 245 will generate significant sales volume over and above the breakeven volume. The R & D allocation is maintained at 15 %. In the case of X6, as the variable costs are higher at $ 250 per unit, the R & D was reduced to 45 %. In order to attain a similar level of profit as that of previous time warp, the price to be charged was found to be $ 409. The value was obtained by considering that same level of sales volume will be generated as that of previous time warp. As the variable costs of X7 are significantly lesser at $ 65 per unit, the R & D allocation was increased to 40 %. The price was set at $ 177 as per the CVP calculations. The results for the year 2006 are presented based on the above decisions. Year 2006 Product Price R & D Profits X 5 $ 245 15 % $ 131,357,113 X 6 $ 409 45 % $ 165,712,926 X 7 $ 177 40 % $ 9,451,313 Total $ 306,521,352 Year 2 - 2007: In 2007, the price of X5 is maintained at $ 245 and the R & D at 5 %, as the fixed costs are higher. Maintaining the price and lowering the R & D will reduce the required breakeven volume. The products X6 and X7 were allotted the remaining R & D s of 60 % and 35 % respectively. The fixed costs for X6 have increased due to higher R & D. Moreover the variable costs of X6 are higher. Hence the price was increased to $ 421 as per CVP analysis. However in the case of X7, the price is decreased to $ 173, as the expected sales volume is higher. The results based on these decisions are presented below: Year 2007 Product Price R & D Profits X 5 $ 245 5 % $ 76,622,321 X 6 $ 425 60 % $ 219,962,605 X 7 $ 173 35 % $ 45,957,399 Total $ 342,542,325 Year 3 - 2008: As the data from Joe Schmoe’s period indicates that the product X5 does not generate significant sales volume to cover its high fixed costs of $ 70 million. Based on this data and the required breakeven volume for X5, the decision is made to discontinue the product X5 in 2008. As the breakeven volume for X6 was reduced significantly when the R & D allocation was reduced to 35 %, the price of X6 is maintained at $ 425 this year. However, the price of X7 is increased to $ 176 per unit with an R & D allocation of 65 %. The outcomes of the above decisions are presented in the following table. Year 2008 Product Price R & D Profits X 5 - - - - - - X 6 $ 425 35 % $ 229,148,427 X 7 $ 176 65 % $ 93,860,109 Total $ 323,008,536 Year 4 - 2009: As X5 stands discontinued this year, the R & D allocations are maintained as those of previous year. Data from time warp 1 indicates that there is a significant drop in the sales volume of X6. In order to ensure that there is no loss from the productions of X6, the CVP analysis indicated a higher breakeven volume. Hence the price was reduced to $ 415 per unit. In the case of X7, as the sales volume is expected to increase significantly this year, the price of the product is reduced to $ 170 per unit, to ensure at least a similar level of profit as that of the previous time warp. The outcome for year 2009 is presented as follows. Year 2009 Product Price R & D Profits X 5 - - - - - - X 6 $ 415 35 % $ 69,617,975 X 7 $ 170 65 % $ 196,479,508 Total $ 266,097,483 Net Income: The total income for the four year period amounts to $ 1,448,449,812, which is slightly lesser than that of time warp 1 ($1,460,228,850). However, the net income is significantly higher than the results obtained by Joe Schmoe. The profits from the time warps 1 & 2 are presented below for comparison. Product X5: The results from time warps 1 & 2 are presented below: X5 Year Time Warp 1 Time Warp 2 2006 $ 121,283,763 $ 131,357,113 2007 $ 95,739,296 $ 76,622,321 2008 - - 2009 - - Total $ 217,023,059 $ 207,979,434 It is evident that the profits increased in 2006 whereas decreased by almost $ 20 million in 2007. Hence the overall strategy for X5 has to be revised. While the R & D allocations be maintained at 5 % and 15 % respectively, the price can be increased to $ 247.5 in the next time warp, as it will result in increased profitability. Product X6: The results from the two time warps are as shown in the table below. It is evident that the profits have increased in all the years except 2007. Hence the strategy for year 2 has to be revised to ensure at least similar levels of profitability. X6 Year Time Warp 1 Time Warp 2 2006 $ 164,330,936 $ 165,712,926 2007 $ 242,383,577 $ 219,962,605 2008 $ 207,674,651 $ 229,148,427 2009 $ 70,745,371 $ 69,617,975 Total $ 685,134,535 $ 684,441,933 The price in 2007 can be reduced to $ 420. Also, the R & D allocation can also be reduced to 50 % - the same value as that of time warp 1. This will ensure reduced fixed costs and the reduction in price will induce more demand to increase the profitability. Product X7: The following table lists the profits obtained from the product X7 in the time warps 1 and 2. The results for X7 in time warp 2 indicate that the profits have reduced in all the years except 2007. Hence a revision in the both the price and R & D allocation is required. As the R & D for X6 has to be changed in 2007, the R & D for X7 has to be set at 45 %. This will improve the performance of the product inducing more demand. Pricing needs to be changed as well. In 2006, the price can be reduced to $ 176 and then maintained at $ 177 per unit. The R & D allocation in the year 2008 can be slightly reduced to decrease the fixed costs involved. . X7 Year Time Warp 1 Time Warp 2 2006 $ 10,889,258 $ 9,451,313 2007 $ 42,810,311 $ 45,957,399 2008 $ 96,602,836 $ 93,860,109 2009 $ 197,488,735 $ 196,479,508 Total $ 347,791,140 $ 345,748,329 Summary: The prices were fixed solely based on CVP analysis and the data from time warp 1. The market demand was not taken into account and hence the results differ significantly in the simulation. It is evident that market demand plays an important role in the pricing of products and pricing aimed at maximum profits based on volume alone will not yield the expected results. The relationship between price and demand is clearly exhibited in the results obtained in time warp 2 and have provided the necessary strategy to be followed in time warp 3. Works Cited Samuels, J. M., F. M. Wilkes and R. E. Brayshaw. Management of Company Finance. 6. London: Thomson Learning, 2000. Read More