Introduction
Happy New Year to You!! Some may have thought that this day could never be a happy one for Clipboard Tablet Company but as I take my position with the company I am more than excited for this day. The reason for my excitement is that this year Clipboard Tablet Company will develop an organizational based on the results of the prior financial years and will conclude with an even better method for going forward. In order to be effective in the long term changes are imperative. The one area that will receive a new life and outlook is the Research and Development Departments because it takes about two to three years to see the effects of the changes in this department. So the decisions that are made in 2016 will be seen in the marketplace as revenues in 2018-2019. Forward looking thinking for this department in the future is one of the new policies that I intend to institute,
As we look for other solutions there are many suggested strategies and suggested outcomes. One of these comes from the cost-volume-profit analysis. We will speak of this strategy in depth in our calculations section of the report because it is integral in the success of this year’s procedures. If Clipboard Tablet Company had a crystal ball then they could find out how many customers were going to by X5, X6, and X7. This analysis tool serves as the second best way to determine the best and highest product .
The CVP (cost-volume-profit) analysis is powerful and will be used to assist in the review of the accounting in the years 2012-2015 and then to forecast the best method going forward. The development in the new strategy is the purpose of the year 2016 as it is a pivot year for Clipboard Tablet Company. New strategies are needed for the short term and to guarantee competitive products new strategies are needed for the future.
Background
There are three products of the Clipboard Tablet Company. It manufactures these three tablets from 2012. The Marketing Department controlled the internal variables for each of the three products, the prices of each of the tablets, and the amount of R&D allocated for the development of each tablet. The Marketing Department also had the ability to determine whether or not to discontinue the products. The strategy of the former Vice President of marketing set the same prices for the whole period and the same percentage of R&D to each product respectively. The company posted a total profit of $1,523,237,527 from the four year period of 2012-2015 .
Additionally, having reviewed thoroughly the work of the previous VP the new emphasis will be on the maximization of the short term profits of the company and discounting X7 and changing the allocation of R&D as 25% and 75% to the first and second products, X5 and X6. The pricing for X5 was set at $285 during the whole period and the pricing of X6 at $550 in 2012-2013. In 2014 the price was lowered to $545 and in 2013 was again lowered to $540. Small increments so the difference is rather significant. This strategy resulted in a cumulative profit of $2,174,502,513. This strategy was effective in the short term but lead to quick market saturation and could eventually lead to the decline of the long term future of the Clipboard Company because there are no more competitive products. This year the situation will be different and a more balanced strategy which benefits the long and short term will be implemented.
CVP (cost-volume-profit) analysis is similar to a break even analysis and is used in operational decision making. This tool is a form of cost accounting useful in calculating the changes in volume and costs might affect the company’s profit and revenue . With the CVP model, total costs are defined as fixed costs plus variable costs, and total revenue is determined as the sales price multiplied by the number of units. Profit (or Loss) with CVP is measured as the unit contribution (unit profit-unit variable costs) times the number of units less total fixed costs . CVP analysis can be used to determine target income sales and associated volume and pricing.
CVP needs assumptions in the ability to calculate the formula. The following assumptions were used in these calculations, sales price per unit are constant, as well as variable cost per unit, total fixed costs are also constant, all items which are produced will be sold. If there are multiple products, the products are sold in the same mix, and the behavior of cost and volume is described by linear relationship.
Strategy based CVP Analysis 2012
Sales units 810,000 265,000
Contribution margin 81,000,000 41,075,000
Less: Fixed costs $75,200,000 $37,600,000
Income $5,800,000 $3,475,000
Total income $9,275,000
Strategy Based CVP Analysis for 2013
Strategy Based CVP Analysis for 2014
Strategy Based CVP Analysis for 2015
CVP (cost-volume-profit) Analysis for the New Year for the Clipboard Tablet Company
The Clipboard Company will be analyzed using the CVP analysis for the past four years. It is possible to determine the minimal sales volume required for reaching the breakeven level for the product at the specified price level. As the same time, CVP (cost-volume-profit) Analysis does not consider the changes in demand for the X5, X6 and X7 products with the differences in price and performance. It is necessary to look at the price elasticity for these products and also look at the performance elasticity of demand (changed associated with R& D investments.
It is therefore suggested that increasing short term profits, and then to gradually invest in X7. This procedure will place the main emphasis on the best producer the X6 and with the sales of X5 to the life cycle end. This offered solution for the New Year will illustrate further the intense development if the X7 model and the increased R& D in the X7are supposed it increase in 2015 when it develops to maturity and enters the growth phases.
The choice of the CVP is suggested as a better tool to evaluate the pricing and other costs of profitability by considering the minimum level of sales to avoid loss. The products of X5 and X6 are in the growth phase that means that there is a requisite to increase the R&D expenses in order to increase the additional features for the demand for the product to increase.
For the New Year
Clipboard Tablet Company like so many other companies will implement the development of a revised strategy using CVP. This analysis implements the current prices are close to the best price point and the best strategy will be to increase R&D investments. Discontinuing the X7 is not a long term strategy so the result was the two year loss. The change in this strategy makes a small investment into X7 while it is in the beginning stages.
Our New Year’s strategy is to invest a sizeable but cautious amount into X7 and its development based on a very short span while the table is only in the introductory stage. The new strategy will be developed on the assumptions of the linear relationships between price, performance and demand. Changes in the improvement of the strategy of a nonlinear analysis of these relationships will be part of the new plan. Furthermore, operational decision making will be improved by Net Present Value (NPV) and the Internal Rate of Return (IRR) analysis of the production of the X5, X6, and X7.
Works Cited
Backman, Maurie. "Uses of CVP Anlaysis." Motley Fool 25 DEc 2015. [online]http://www.fool.com/knowledge-center/2015/12/25/what-is-cvp-and-how-is-it-important-to-managerial.aspx.Accessed FEb 2016.
Editor. "Assumptions for CVP Anlaysis." 2012. [online] http://www.accountingdetails.com/assumptions_of_cvp_analysis.htm, Accessed Feb 2016.
Hansen, Maryanne MOwen. Managerial Accounting. Thomson/South Western, 2006. [online] https://books.google.com/books/about/Managerial_Accounting.html?id=K2Nbp7xKXjcC. Accessed Feb 2016.
Kelleher, John. "Internal rate of return: A cautionary tale." McKinsey Quarterly 2004. [online] http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/internal-rate-of-return-a-cautionary-tale. Accessed FEb 2016.
Rehman, A. (2014). Cost-Volume-Profit relationship (CVP Analysis). Accounting for Management.
Accessed Feb 2016 [online]http://www.accountingformanagement.com/
cost_volume_profit.htm
Sim, Tablet Development. "Forio Simulate." 2012. [online] https://forio.com/simulate/dairel.newton/tablet-development-sim-2012-4-/overview/. Accessed FEb 2016.
