Clipboard Tablet Company produces three types of tablets: X5, X6, and X7. They are characterized by a different level of popularity among the customers because these products are at different stages of their development. The cost-volume-profit (CVP) analysis should be applied to the discussion of the products’ prices in order to propose a new strategy for the company to promote these products in the market and increase revenues. The purpose of this paper is to evaluate the strategic decisions that were proposed previously in order to contribute to the sales of tablets and to formulate a revised strategy that is based on the results of the CVP analysis.
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Principles of CVP Analysis
It is important to note that the CVP analysis is an approach that is used by managers in order to determine the relationship between the product’s price, variable costs, fixed costs, volume, and expected profits (Needles & Crosson, 2013). The application of this analysis allows for understanding what changes should be made in the product’s costs and price in order to achieve the desired profits (Drury, 2013). In order to propose the most effective strategy for selling X5, X6, and X7, it is relevant to refer to the CVP analysis because it demonstrates the optimum price for the selected product, the appropriate volume of manufactured products, the impact of changes in costs on sales, and the forecasted profits (Rajan, Datar, & Horngren, 2015). Furthermore, the application of the CVP analysis is important when it is necessary to determine the breakeven point and set not only the adequate price but also the lowest price for the product.
Analysis of the Previous Decisions and the Revised Strategy
The previously set strategies for the promotion of X5, X6, and X7, as well as the associated pricing, need further evaluation and revision in order to achieve higher profits and sales revenues. According to Table 1, in 2012, there were no changes in the strategy in comparison to 2011. Therefore, profits in 2012 are correlated with profits in 2011 (Table 1). This approach can be inappropriate since annual fluctuations in the market should be taken into account while developing the pricing strategy (Weygandt, Kimmel, & Kieso, 2015). The CVP analysis indicates that if the price for X5 will be decreased in 2012 to $280, and the R&D percent will be decreased to 30% because of customers’ worries about the price and the necessity to develop X6 and X7, it is possible to expect production of 950,356 tablets and profits in $45,000,000 (Table 2).
For X6, it is relevant to invest more in its research and development and make the price stable. The increase of R&D percent to 36% will lead to decreasing the volume of produced tablets and to increase profits in comparison to previously documented profits in $37,579,840 (Table 2). For X7, the strategy should be based on making the product more attractive to the public, and it is relevant to invest more in the research and development unit in order to improve performance (Needles & Crosson, 2013). In this case, it is possible to expect profits in $30,000,000 while producing 715,201 tablets (Table 2).
Table 1. Previous Decisions for Clipboard Tablet Company.
According to the prior strategy, changes in the R&D percent for X5 and X7 were planned for 2013 (Table 1). In order to guarantee higher profits, it is also important to decrease prices slowly (Drury, 2013). In order to increase profits for X5 at $46,000,000 in 2013, it is relevant to make the price $278 per unit (Table 2). For X6, the purpose is to reduce the price and increase profits. The prior approach seems to be relevant for this stage of the product development, but the decrease in the price needs to be gradual, and the price in $420 should be proposed (Table 2). X7 is a new product in the market, and the proposed decision to contribute to its research and development is relevant while preserving the price at the same level and orienting to the target profit in $35,000,000. The rise in the volume is preferable in this case because it is necessary to attract and reach more customers.
In 2014, the popularity of X5 can decrease among the customers, and it is relevant to decrease the price and R&D percent (to 29%) while increasing profits (Table 2). The volume increases slightly in this case. While promoting X6, it is important to guarantee high sales. The previously applied strategy led to decreases in sales because of the absence of the correlation between the price and investment into research and development (Table 1). At this stage, it is relevant to invest more in research and development while making the price comparably low. The volume of produced X6 should increase, as well as sales revenues. The expected profit is $50,000,000 (Table 2). In 2014, X7 can win the position in the market, and the sales revenues should increase. In order to achieve this effect, it is necessary to reduce the price while increasing the volume. This step was proposed previously as one of the strategic decisions for this product. The expected profit, in this case, is $40,000,000 (Table 2).
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In 2015, it is important to decrease the volume of produced X5 in order to promote other products. In comparison to the previous strategy, at this stage, it is also important to decrease the price and R&D percent while achieving stable sales and profits (Rajan et al., 2015). The prior strategy is based on the idea that the price for X6 will increase, as well as the investment in the research and development of the product. In order to make X6 attractive to the public, it is important to invest into its research and development, but the percentage can be lower than it was proposed previously. It is possible to expect the profit in $60,000,000 while setting the price in $410 (Table 2). The volume will increase proportionally to the number of customers interested in this product. In 2015, X7 will be a popular product with high revenues. At this stage, it is possible to decrease the investment in the research and development, and the price can remain stable (Table 2).
Table 2. The Revised Strategy according to the CVP Analysis.
The expected sales revenues will grow for X6 and X7, but sales of X5 can decreases in 2015 because of the active promotion of alternative products proposed by Clipboard Tablet Company. It is also possible to observe reductions in the sales revenues for X7 if customers are not interested in the product. Therefore, more attention should be paid to promoting X7 that is advantageous in terms of its price and potential attractiveness to the public as a cost-efficient tablet.
The use of the CVP analysis is important in order to decide regarding the pricing set for three selected products. When a manager makes a decision on the pricing strategy, he or she is focused on the correlation between costs and profits. The CVP analysis allows for taking these aspects into account while developing the appropriate pricing strategy. The application of this approach to setting prices in the case of X5, X6, and X7 products leads to predicting profits that are associated with the customers’ interest in the proposed tablets during four years.
Drury, C. M. (2013). Management and cost accounting. New York, NY: Springer.
Needles, B., & Crosson, S. (2013). Managerial accounting. New York, NY: Cengage Learning.
Rajan, M., Datar, S. M., & Horngren, C. T. (2015). Cost accounting. New York, NY: Pearson Higher Education.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial and managerial accounting. New York, NY: John Wiley & Sons.