CVP Analysis Report

The goal of every business is to achieve a huge customer base by the growth of its brand and thus make profits. About the previous work for this course, SLP one, two, and three have illustrated the importance of strategic management plans in the process of maximizing profits. Through the course, strategic management has assumed the definition of a process is an organization’s strategy or a process used by managers to make decisions or choices on a strategy to improve the performance of the business (Lamb, Hair & McDaniel, 2012). Besides, Cost Volume Profit analysis emerges as an important tool in the strategic management process, with enhanced efficiency by CVP calculators. By definition, CVP analysis is the process of factoring in the effects of cost and volume variations on business operation and profits. It is another term for breakeven analysis, whereby the business managers utilize breakeven points of volume and cost structures in strategic management for short economic periods.

CVP analysis helps identify the volume of sales that could practically cover costs and break even. Fortunately, technology has contributed to this niche by making it possible to calculate CVPO using calculators or simulators. In the SLP three, strategic management decisions arose from the evaluation of data from the CVP calculator provided by the school. The SLP three required simulation of law data to identify the most practical prices of products over four years, 2013, 2014, 2015, and 2016. The process aimed at improving the former recommendations made in SLP one, to finally present recommendations for the Wonder company. Notably, the Wonder company did not succeed as throughout the four years due to weaknesses and threats highlighted in the SLP two, and poor strategic management process under Joe’s leadership. Therefore, considerable time for this assignment entailed establishing mistakes made by Joe and his management board, collecting data, simulating the marketing and management process, and refining the recommendations. At the premiere of the refining process, I found that the Wonder company should have accumulated revenues of W1 amounting to $153,153,103.45against $53,736,400 made by Joe’s management. Throughout this essay, I will break down the analysis, recommend and justify the decisions that Joes could have made to maximize profits.

CVP Analysis Results for The Year 2013

For the 2013 simulation acted as the reference point for the whole process. That is, we trace the life cycle of each product and its pricing as far as January 1^st, 2013. Concerning the first product W1, the year 2013 simulation treated it to be at the growth rate in a price-conscious market environment. From that view, given that the simulation works by varying prices and costs to identify the most practical strategy for maximum profits, the W1’s price was changed from $285 to $260. Also, the research and development allocation for W1 amounted to 33%, slightly lower than on W2.

In the same way, the prices for W2 and W3 reduced to $334.80 and $188.85 from $430.00 and $190.00, respectively. The research and development value for W2 was 34% and 33% for W3. Though the year served as the reference point, all the products were in a price-conscious market; thus, reducing prices could stimulate the demand for each (Deshpande, 2018). Later simulations would refer to the impact of the variations and the results to improve prices, revenue allocation, and cost. All products realized a

CVP Analysis Results For The Year 2014

The simulation for the fiscal year 2014 treated W1 as to be in the maturity phase and W2 at the growth phase. In that perspective, W1 needed a boost in sales, while W2 required a customer motivation strategy. That is, the price of W1 would be reduced further from $260 to $250.29. The R&D values moved to 30%, 34%, and 36% W1, W2, and W3, respectively. For W2, at the growth phase, the product was highly price-conscious. Hence, the rules for demand and supply favored the reduction in cost, increasing sales and profits. Also, W3 would follow the same strategic process, only that the R&D increased significantly to 36%. The increase ensured enough resources were available to the market and boosted sales synonymous with W1 and W3.

The CVP Simulation For the Year 2015

In the year 2015, W1 is already in the maturity phase, while W2 has begun to mature. Therefore, the price of W1 should decrease further to $242.29 at a research and development value of 28%. Consequently, W2 and W3 have gone through a significant period through their life cycles, and a further decrease in their prices is crucial. Therefore, the simulation identifies the prices of W2 and W3 to be $295.36 and $179.80. The R&D for both amounts to 32% and 40%. Hence, the reduction of R&D for W1 compliments the increase in that for W3. The simulation reflects an increased sales volume and revenue amounting to $689,000,000.

The CVP Simulation For the Year 2016

In 2016, the simulation presented somewhat different analytical data. Firstly, the price of W1 increased rather than dropping as in previous years. Therefore, the input price for W1 in the fiscal year 2016 would be $259.88, at an R&D value of 33%. The increase in R&D value from 28% in the previous year supplements the increase in the product price. However, prices for W2 and W3 decrease slightly from $295.36 and $179.80 to $294.40 and $175.42, respectively. At the end of the fiscal year 2016, the three products accumulate higher sales than the previous years and a sum revenue of $702,020,000.

Decision Making

The decision-making process through every simulation factor in two significant concepts. Firstly, the impact of cost-volume-profit. As mentioned above, CVP accounts for the effects of cost and volume variations on business operation and profits. Also, the CVP theory ensures that the ratio between revenue per unit and cost per unit is favorable to the business, guaranteeing profits at the end of a fiscal year. Secondly, the decision-making process evaluated the concept underlying per unit total cost and per-unit revenue, such that regardless of the per-unit cost, the price of a product considerably higher than the variable cost.

Analysis

During the simulation period, there are several thin not factored in resulting in strategic mistakes. For instance, the true-life cycle of the products as factored into the simulation was theoretical; hence, treating each phase as to change within a fiscal year made the simulation prone to error. In the year 2013, the product W1 assumed the growth stage of its life cycle which ended within the year, as seen in simulation for the year 2014. Also, calculation analysis done for the W3 did not factor much concerning its life cycle. Thus, there might be miscalculations, or results from the calculation analysis may be misguiding. From the simulations, W2 did not reach maturity, yet, the simulation treated it as W1, which had reached maturity. That is, when the price of W1 dropped as a consequence of maturity, that of W2 also dropped, yet it was not at its maturity phase. Notably, a decision-maker must understand the life cycle and the features of products at a particular phase of its life. That way, they can make critical simulation and make informed interpretation of the simulation results.

Comparison of the Decisions

 Both decisions made through the simulations and of Joe have underlying weaknesses and mistakes. Primarily, mistakes in both Joe’s strategy and the simulation occur by not varying the prices by the correct margins. For instance, the price of W1 nor reduced adequately, and through the simulation, the life phase for W2 was mistaken, while that of W3 was not taken into account at all. Besides, the simulation failed to understand that at the growth rate, a product has high sales turnover. A business may take advantage of the two and increase prices other than lowering them. Though the simulation score was higher than that of Joe, the simulation ought to have performed better less the mistakes.

Similarly, Joe made mistakes with price variation during his term. Analyzing his decisions through the CVP simulation, Joe maintained a constant price for all the products throughout the four years. He missed the opportunity to increase the price of products during their growth phase, which could increase revenues. He also failed to reduce the price of products during their maturity phase, hence missing out on the opportunity for increased revenues. Besides, increasing revenues without reducing prices for commodities could barely result in a significant increase in profits.

Comparing Joe’s strategic process and the simulation aided process, the later is better. Joe maintained the prices of the three products, paid no attention to the changes in the life cycle of the products, and failed to realize opportunities to improve sales and revenues. At the growth phase, the price of a product ought to be increased and later reduced during the maturity phase. While the simulation process failed in some ways, there was significant variation in the pricing and R&D, which resulted in higher profits compared to Joe.

Final Changes and Recommendation

Give a chance to conduct the simulation again; one would consider both the theoretical approach of the CVP and the real-time market conditions. For instance, one would closely assess how much product inputs into the sum profits of the business. Hence, it is easy to evaluate the optimal per-unit rate of revenues that produce the most reasonable prices and has a maximum contribution to the cost of a product and optimum R&D value. Hence, the price of each product at a particular phase of its life cycle is set precisely yet established at the best competitive advantage.

References

Deshpande, S. (2018). Various Pricing Strategies: A Review. IOSR Journal Of Business And Management (IOSR-JBM), 20(2), 75-79. DOI: 10.9790/487x

Lamb, C. W., Hair, J. F., & McDaniel, C. (2012). Marketing. Boston, MA: Cengage Learning.