Nov 20, 2020 in Case Studies

Time Warp 5
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Time Warp 5

Cost-volume-profit analysis is a common instrument used to make relevant business decisions. The measurability and objectivity of its results can hardly be overestimated. At the same time, CVP analysis presents difficulties in terms of setting the most desirable levels of future sales and profits. Yet, even the most professional use of CVP does not always guarantee the best business results, since business decisions have to be made in a challenging and sophisticated competitive setting. In other words, numerous factors have to be taken into account, before the final decision is made, and CVP is just one of the many instruments used by business owners to achieve sustained profitability and continuous growth.

 

Comparing the Results of Time Warp 2 and Time Warp 3: The Value of CVP

2012
 

Time Warp 2

Time Warp 3

 

Price

R&D

Sales

Profits

Price

R&D

Sales

Profits

X5

$270

25%

2,064,017

166,682,088

$270

25%

2,064,017

166,682,088

X6

$430

42%

1,288,999

152,214,825

$430

42%

1,288,999

152,214,825

X7

$190

33%

165,586

-23,065,952

$190

33%

165,586

-23,065,952

In many aspects, 2012 year became a year of major decisions and the turning point in the evolution of both strategies. The table above suggests that, through 2012, no differences in the strategic results achieved by Clipboard Tablet, Co. were found. The decision was made to monitor the profits and sales of all three products through 2012, in order to create a complete view of the business and market situation and obtain the basic financial and market data required to perform CVP analysis. The first distinctions in how the three products behaved in the market were to be seen later in 2013-2015, and CVP analysis proved to be a relevant mechanism of effective decision-making for Clipboard Tablet, Co.

2013
 

Time Warp 2

Time Warp 3

 

Price

R&D

Sales

Profits

Price

R&D

Sales

Profits

X5

$260

20%

3,338,507

287,435,771

$266

20%

2,973,073

265,076,411

X6

$400

42%

2,931,306

318,833,237

$448

42%

2,054,041

308,249,170

X7

$190

38%

237,202

-14,597,740

$206

38%

192,737

-17,996,740

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The results of Time Warp 2 and Time Warp 3 can be compared along several different indicators, but profits and sales seem to represent the most reliable measures of quality and effectiveness in 2013. At first glance, the results of the strategic decisions made in Time Warp 2 look more effective and profitable than the ones made in Time Warp 3 with the help of CVP analysis. The latter had to help Clipboard Tablet, Co. increase its sales for the X6, sustain profits for the X5, and cross the break-even point for the X7. For example, the target profit for the X5 was set at $300,000,000, given the results of the previous time period, and a decision was made to reduce the price to $266 (against $260 in Time Warp 2). As a result, the profits and sales for all three products in Time Warp 2 appeared to be better than in Time Warp 3. However, a detailed analysis of the 2012 and 2013 results suggests that profitability per unit was greater with CVP analysis in Time Warp 3 than in Time Warp 2. It is possible to say that, despite lower sales and profits, CVP analysis creates a perfect foundation for gradual, but sustained growth. It creates a smooth picture of business development without major losses, even when changes in sales are not as dramatic as they used to be in Time Warp 2. At the same time, the discussed differences indicate the need to adjust R&D budget allocations to changes in price and expected profits, as their levels are directly related to the financial and market results for all three products.

 
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2014
 

Time Warp 2

Time Warp 3

 

Price

R&D

Sales

Profits

Price

R&D

Sales

Profits

X5

$200

10%

768,792

-38,962,378

$200

10%

1,104,298

-22,185,095

X6

$420

42%

2,262,210

280,440,395

$407

42%

2,999,363

308,249,170

X7

$150

48%

592,774

7,293,538

$206

48%

264,189

-17,996,740

2014 year proved to be particularly successful with regard to the strategic decisions made. CVP analysis was used to achieve better strategic results. Compared to Time Warp 2, CVP analysis in Time Warp 3 led to more reasonable financial and marketing decisions, which, eventually, enabled the company to yield better performance results. Despite the fact that the X5 had already entered the maturity stage of its product lifecycle, CVP analysis allowed reducing the financial losses facing the company. Sales in 2014 were higher than in 2013, although the price and R&D allocations in both Time Warps were literally the same. The X6 operated much better in Time Warp 3 than in Time Warp 2: unlike Time Warp 2, when break-even analyses were performed to keep the X6 on the flow, in Time Warp 3, $350,000,000 were set for the target profit. As a result, the company managed to exceed the earlier result and generated $308,249,170 in profits in Time Warp 3, compared to only $280,440,395 in Time Warp 2. Unfortunately, the price decision made for the X7 in Time Warp 3 did not allow the company to cross the break-even point. Although the price was low enough to attract customers, it did not allow achieving the level of sales required to avoid losses. CVP analysis in Time Warp 2 showed that even $180 per item were enough to yield reasonable profits, and it is unclear why Time Warp 3 did not witness any considerable changes in the price of the product.

2015
 

Time Warp 2

Time Warp 3

 

Price

R&D

Sales

Profits

Price

R&D

Sales

Profits

X5

-

-

-

-

-

-

-

-

X6

$420

35%

865,700

79,493,213

$380

35%

865,700

44,998,533

X7

$180

65%

717,428

36,711,779

$206

65%

371,040

2,927,066

Unlike the dramatic increases in sales and profits for the X7 in Time Warp 2, the strategic decisions made in Time Warp 3 were less effective. It is possible to assume that the results of the break-even analysis in Time Warp 3 were not interpreted professionally. Although both decisions enabled the company to cross the break-even point and make the product profitable, the amount of profits generated in Time Warp 2 was much higher than those yielded in Time Warp 3. R&D allocation decision being similar, it is price that became a serious barrier to increasing the total profits and profits per unit. The differences in how CVP analysis was performed are obvious: in Time Warp 2, $50,000,000 was used as the target profit for the CVP calculator, while in Time Warp 3, break-even analyses were performed at all stages of the X7s product lifecycle. With the price for the X7 being lower, the company managed to attract more customers, increase its sales and profits, and speed up the products penetration further into the market. The main conclusion is that CVP is a useful model for making business decisions, but it demands consideration and analytical thinking to set reasonable profit sales goals.

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Conclusion

Overall, CVP analysis alone does not guarantee outstanding business results. Companies must always consider the contextual factors, which can influence price and R&D allocation decisions. The analysis of the decisions and results in Time Warp 2 and Time Warp 3 showed that the stage of the product lifecycle played a huge role in the quality and efficiency of CVP targets and results. At the same time, CVP analysis has proved to be a relevant mechanism for promoting the organization's smooth gradual growth in a long-term perspective.

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