(slp 5) Case:System Feedback Loops, SLP: Time Normal - Essay Example

The results from time warp 2 were analyzed and the inputs for time warp 3 were refined using CVP analysis. The input (decisions) for the time warp 3 from the year 2006 to 2009 is presented in the decision matrix below. The profits from the time warp 3 are presented in appendix 1. According to CVP, at similar fixed costs and variable costs per unit, the profits should increase with an increase in price (Emery, Finnerty and Stowe). However in time warp 3, the profits declined as the volume was lesser (due to the increased price).

Similarly in 2007, as the price was reduced significantly, the volume increased due to rise in demand and the profits are also higher. As the fixed costs are significantly higher ($ 70 million + R & D expenses), the product X7 is discontinued in 2008. Overall, the profits from X5 have increased by $ 9 million in time warp 3. It is evident that significant differences are noted in years 2007 and 2008. In both the years, the price was reduced from $ 425 to $ 422. The unit contribution margin reduces with the selling price (Samuels, Wilkes and Brayshaw).

In 2007, the R & D was reduced to 55 %. This resulted in total fixed costs of $ 81 million compared to $ 82 million in time warp 2. In order to attain similar levels of profit ($ 220 million), at least 1,067,376 items have to be sold in time warp 3. However the actual sales were significantly higher due to the decreased price. Hence there is a high profit variation in 2007. However in 2008, the fixed costs were higher ($ 82 million) and a significant market has been acquired in the previous year.

Hence there is a drop in profits in 2008. Overall, the profits from X6 have increased by almost $ 12 million in this time warp. Similarly in 2008, the R & D allocation was reduced by $ 1 million. However the price was also reduced resulting in an increased sales volume. The $ 1 million savings from R & D and $ 600,000 from increased sales volume account for the total increase in profits.