The company PDA Sim generates two products (PDA Phone and PDA phone with camera) and wishes to come up by way of a strategic decision on the subject of which product to be stopped from manufacture in the year 2006, 2007, 2008, and 2009. The lifecycle of the two products is different in the marketplace and the most suitable decision on the subject of continuing manufacture of any of the two products is required. In this paper, I will carry out a Cost-Volume-Profit analysis for PDA products by calculating the involvement margin for products.CVP analysis of the two products will help to decide to continue the production of any of the two products. CVP study is an apparatus used by managers of the organization to verify the relationship among costs, volume, and profit that is prepared by a company. This instrument also employs various elements such as costs, sales level, unit variable expenses, fixed costs, and the product mix of a business.
CVP analysis
CVP analysis is useful in creating decisions for example the products to be produced in an exact time phase, the strategy to be modified to cost products, and the kind of apparatus to be obtained by a company. The break-even point is utilized to assess the cost-effective sales capability of the firm. At the break-even point, a firm formulates neither profits nor losses. Cost-volume-profit analysis means the study of the possessions of changes in costs and volume on a company’s earnings. It is very important in profit planning. It also is a serious factor in such management decisions as setting selling prices, determining product mix, and maximizing the use of production services. It enables decision-makers to assess how much volume they need to avoid a loss or maintain a certain margin of safety. “They use cost-volume-profit (CVP) analysis to identify the levels of operating activity needed to avoid losses, achieve targeted profits, plan future operations, and monitor organizational performance” (Chapter 3: Cost-volume-profit analysis, 2004, p.1)
Assumptions of CVP Analysis
Following are the assumptions of CVP analysis:
- The fixed costs stay fixed still over a wide range of action.
- There are all costs can examine into their fixed and variable fundamentals. Changes in movement are the only factors that involve costs.
- All units created are selling out and selling price is same per unit.
While above one kind of product is selling, the sales mix will remain stable. That is, the percentage that all products represent of whole sales will keep on the same. Sales mix complicates CVP analysis because different products.
Cost volume profit analysis is the method through which there can calculate changes in profit according to the change in cost, volume, and price. The basic equation of CVP analysis is “profit=total revenue-total cost”. “CPV analysis is a system used for checking how changes in the volume of production affect the costs and thus the profits. It is an expanded form of break-even analysis, which simply identifies the breakeven point” (Lister, 2010, para.1).
This analysis is simply enables the decision makers to asses how much volume they need to avoid a loss or to maintain a certain margin of safety. It also helpful to shout term decision associated to pricing advertising price structure and more. CVP analysis does not allow a role for inventory which means that we must incur the production period. Actually CVP analysis is not always provided best solution but it is a tool for decision making. CVP analysis requires changeover of known amounts in the method to solve for an indefinite amount.
Sales – variable=contribution margin:
Unit sales price – $200
Unit variable – $120
Unit contribution margin – $80
Contribution margin for PDA Phone $499-$260=$239
C. Margin for PDA phone $200-$120=$80
Total sales – $1957000
Variable – $916000
Contribution margin – $1041000
Fixed cost – $500000
Net income – $541000
Total contribution Margin of PDA phone =$239X$3=$717
$80X$2 = $160
$717-$160= $557
Analysis
The organization of PID products will continue at the time net income is positive. Or else the organization of PID products should terminate at the time net income is negative.For the two years the invention has been in the marketplace only profit have been recorded.This is clear confirmation that the organization should think continuation of these two products. In view of the fact that there are many advantages generated from manufacture scheme for these two products.
Strategy
The strategy consists of the Prices, R&D Allocation %, and any product discontinuations for the X5, X6, and X7 PDAs for each of the four years: 2006, 2007, 2008, and 2009. The intensification of struggle the global markets and companies are looking for improved strategies of pricing and raising their products to realize a competitive edge. Suitable pricing and product development policy will get better the position of a company in the market by attracting new clients, retaining presented customers and creating customer faithfulness. “The Product Life Cycle (PLC) is based upon the biological life cycle. For example, a seed is planted (introduction); it begins to sprout (growth); it shoots out leaves and puts down roots as it becomes an adult (maturity); after a long period as an adult the plant begins to shrink and die out (decline)” (The product life cycle, 2010, para.1).
In this case the report about analysis of three products manufactured by PDA Sim Company. There are pricing strategies adopted by the company and presentation of each product in the market has been analyzed. The PDA Sim introduced products are Handheld X5, Handheld X6 and Handheld X7. Products X5 come in the market for three years and customers are providing good respond. The maturity stage of this product of a product-life cycle and repeat customers tend to go above new customers. Product X6 was comes in the market for 2 years ago and is at the shakeout stage of the product-life cycle. These product customers are also new customers or repeat customers. Product X7 was introduced a year ago and is at the growth stage and customers for this product are new customers. There are product-life cycles of the three products shows all the three products have an increasing sales volume at the opening as this pattern declines, assume a raised land shape and later declines with time. In this case new customers are introduced products in the market other than repeat customers continues the product existing in the market.
Conclusion
In review of the analysis we can say that if any product has negative operating income should be stopped from the manufacture system because the costs acquired by the business be more than the produced revenues and if any product has positive operating income should be continued from the manufacture because the costs acquired by the business be less than the produced revenues.
Reference List
Chapter 3: Cost-volume-profit analysis. (2004). Web.
Lister, J. (2010). What is CVP analysis. Wise Geek.
The product life cycle. (2010). Marketing Teacher.Com. Web.