Cost Volume Profit Analysis

Table of Contents

Introduction

Cost-volume-profit analysis is an accounting tool used to forecast sales and make decisions concerning pricing, cost allocation, and product discontinuation. X5 tablet has been in the market for 3 years and its market performance in its shakeout phase approaching maturity, according the to the simulation results. Its customers are sensitive to price changes. Therefore, its price requires a slight downward adjustment. The calculation of break-even analysis uses price, variable cost. Cost-volume-profit calculates the break-even point in unit sales and dollars.

Price Determination

2012	X5	X6	X7	2014	X5	X6	X7
Contribution margin per unit.	265	400	195	Contribution margin per unit.	100	125	115
+ Variable cost per unit.	150	275	55	+ Variable cost per unit.	150	275	55
Price per Unit.	265	400	195	Price per unit.	250	400	170
2013	X5	X6	X7	2015	X5	X6	X7
Contribution margin per unit.	50	19	83	Contribution margin per unit.	112	339	137
+ Variable cost per unit.	165	420	170	+ Variable cost per unit.	138	61	33
Price per unit.	265	420	170	Price per unit.	250	400	170

2015 Financial Year Analysis

Product	X5	X6	X7
Unit Price.	250	400	170
Minus Variable Cost per Unit Product.	138	61	33
Unit Contribution Margin.	112	339	137
× Sales Mix Ratio.	24%	27%	49%
	2,688	9,153	6713
Sum: Weighted Average Contribution Margin.	18554
Total Fixed Costs.	782,765,762
Units of Sales Mix necessary to break even (Total Fixed Cost ÷ Weighted Average Contribution Margin).	42188
Break-even Point in unit sales (Divide Units Of Sales Mix by product Sales Ratio).	10,125	11,390	20672
Break-even point in dollars (Break-even point in unit sales × Unit price).	2,531,250	4,556,000	3,514,240
Sum: Break-even point in dollars.	10,601,490

Break-even analysis

In 2012, the break-even point in dollars is 8,962,970. This represents the amount of sales, in dollars, that Clipboard Tablet Company must achieve, in order to break even. In relation to the simulation results, Clipboard Tablet Company sold 3,955,935 units equivalent to 1,323,125,098 dollars, in revenue.

In view of break even analysis, the company made the right decisions in fixing prices and allocating the research and development costs, in the financial year 2012.In 2013,the break-even point in dollars is 9,792,140.In 2014,in the simulation of the performance of tablet products, the financial year 2014 produced sales of 2,342,141 unit products equivalent to 651,829,682 dollars, in revenue.

In respect of the break even analysis, the total sales and revenue surpassed the level required to break even. However, the individual products X5, and X6 met the threshold for break-even point, but showed a decline as compared to the previous year. In 2015,the break-even point in dollars is 10,601,490. The total number of units sold was 2,095,885 while the revenue received was $503,568,597. This is according to the results of the simulation. This is much higher than the requirement for break even both in terms of unit sales and dollars as shown in the cost-volume-profit analysis.

Research and Development

In relation to the R&D cost allocation, tablet X7 is performing well relative to the performance of the other products. The performance of X6 is declining but not due to maturity. It has the potential for improvement of sales and revenue. Therefore, the company will increase the allocation for R&D for X6. In relation to X5, the product requires elimination from the market, in order to cut costs. Its market performance is at maturity; the company anticipates no further improvement in its sales and revenue.

Change in Strategy

Financial year 2015 is the year that is instrumental for making decisions for 2016. In 2015, the simulated, total number of product sales is 2,095,885 while the total revenue generated was $503,568,597. In general, the Clipboard Tablet Company shows progress with sales showing an increase with time. However, tablet X5 and X6 exhibit a rapid decline in individual sales and revenue. The company will adjust the price of tablet X6 to the level of market rates for equivalent products.

The company will increase the allocation for market research and product development, in order to boost the sales of the product. The other recommendation is that the company will face out X5 from the market because of the expression of signs of maturity. Its sales are declining and affecting the overall performance of the company.

References

Elson, J. (2012). Tablet Development Simulation. Retrieved from, www.forio.com/simulate/jelson/tablet-development-sim/run/#p=page3

Prihadyanti, D. (2011). “CVP Analysis Incorporating the Cost of Capital on R&D”. International Journal of Engineering Science and Technology, 3(4): 3446-3448.

Steward, R. (2004). “Simulation: the Practice of Model Development and Use”. Hoboken, NJ: John Wiley & Sons.

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