CVP Company Analysis
Improving product performance is the most topical issue that senior management of a company is facing today. Company growth in a competitive environment hinges on superior performance of price and R&D allocations. Improving R&D performance is the major challenge that frustrates the top management of an organization as most organizations have endured repeated restructuring, as well as other management interventions, with little to show from it. Thus, any attempts to revolutionize product performance are often met with skepticism. The failure of many companies to improve their product performance is not due to lack of commitment by the management involved, but it is due to the misconception about the price and R&D performance. Price and R&D allocation result from a combination of a number of different decisions and choices, including the size of prices and R&D facilities as can be seen in Time Warp 3 and Time Warp 2. This paper is going to review and compare the results and decisions made in Time Warp 3 and Time Warp 2, using CVP analysis in explaining the difference.
R&D Allocation and Prices
The essential feature of this difference is to point to the influence of one thing on the other. There are only two ways in which one variable can influence the other variable. For instance, sales add to revenue; even if they decrease, they will still add to revenue. In the same way, when R&D allocation and prices of the products are decreased, they still add up to profits, but with higher sale volumes. When the R&D allocation and prices were increased in Time Warp 3, the same profits were realized, but with much reduced sale volumes. This indicates that higher sales volume will result in lower prices (Yunker, 2006). Likewise, the volatility of sale prices also has effects on the product sale in cases where customers cared more about the product prices.
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In Time Warp 2, the company uses CVP analysis to plan for a strategy that will help in maximizing profit earnings of its products. CVP is the basis for the budget variable; hence, it is useful for planning and control. With the help of CVP analysis, the company was able to develop different approaches required to make effective decisions regarding prices and R&D allocation to enhance its profits. One significant decision was to review the pricing of X5 product downwards to increase its unit sale, and the product was to be discontinued by 2016 since it would have completed its maturity phase. The product was to be sold at the price of $245 at 30% R&D allocation to achieve the target profit of $100 million.
The company also planned to increase the R&D allocation for X6, as well as its unit price, to take advantage of the product investment. The strategy was to attract more customers, thus, increasing profits. Though X7 has been present in the market for a short period of time, it has shown signs of improved performance. The plan was to increase R&D allocation and pricing in its maturity phase. The strategies were meant to save the company from losses and achieve net gains above the breakeven point. Using CVP analysis, it was evident that changes in the levels of revenues and costs of the products were caused by the changes in the unit sales of the products. The assumption is that the sales mix of the products remains constant as the unit sales of the products change.
In Time Warp 3, the company embarked on forming relevant frameworks that would help it come up with sound business principles and values. Following the profit allocation in Time Warp 2, a price based on the value method was used in the analysis. Time Warp 2 focused on reducing R&D allocation, as well as the prices of products, to realize the target profit for the given product. Using this method resulted in higher sales volume at lower prices. In Time Warp 3, X5 was discontinued; consequently, the R&D allocation for X6 and X7 increased. The prices for the products were increased alongside the R&D allocation. This was mainly due to rises in the demand for the products.
The time line summary is provided below:
SPL 1, 2012-got hired to replace Joe Schmoe and turned in the first report.
SPL 2- Time Warp 1 begins. After going through all the four years, I realize that there are some changes to be made. I develop a report summary of the performance and hope for 2016.
SPL Time Warp 2 begins. I realize that there is still a lot to be done. Using CVP analysis, I decide to make strategies on how to improve the performance of the company. As a manager, I intend to develop a four-year plan for my strategy. I follow the strategy using pre-determined decisions for each year through to 2015, keeping track of financial and marketing year-by-year results. I then celebrate and hope the time warp is over.
SPL 4- Time Warp 3 begins. Things have not worked as planned and I realize that I have to revise my strategy. I use the same approach as in Time Warp 2 and develop a revised four-year plan through to 2015. I begin to implement the strategy keeping track of both the financial and marketing results year by year. I celebrate and hope that things will work out as planned.
SPL 5- I am happy to make it through the time warps after implementing and following the pre-determined decisions. I analyze the results comparing Time Warp 2 and Time Warp 3, showing their differences and developing my final report. In 2016, I celebrate my achievement and resume my regular life.