Cost-Volume-Profit Analysis and Product Strategy

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Cost-Volume-Profit Analysis and Product Strategy

Introduction

Cost-volume-profit (CVP) analysis is conducted to determine the variable and fixed costs as well as to make pricing and activity decisions. This analysis is very important and enables the business to plan its profits in advance with respect to its knowledge of its costs and its ability to set the prices. In addition, the CVP analysis also determines the product mix. In this way, the management is able to make critical decisions regarding its various products when it knows its cost structures. Furthermore, the management is able to make the CVP income statements that describe the various variables that will generate the desired profits for the management (Weygandt, Kimmel, and Kieso, 2010).

There are also other benefits of CVP analysis. For example, it enables the managers to know the breakeven point of the business. In this way, the managers can alter the levels of production to achieve the profitability in their desired time period. Further, the CVP analysis also provides the detailed snapshot of the business. Therefore, the managers are able to identify the variables that affect the bottom line. At the end, the managers are also able to adjust the various heads of costs to achieve the required profitability (Lewis, 2012).

We have also used the CVP analysis to determine our product strategy for the Clipboard Tablets for the next time warp which is from 2012 to 2015. We have planned the various products for this period and we know our expected profits, prices, and cost structures for the given years.

Strategy for Clipboard Tablets

Our strategy for the clipboard tablets involved determining the desired profits for the given years. We found that our profits would grow to $90 million in 2012. Subsequently, these will grow by 10%, 20%, and 25% respectively in the forthcoming years. This makes the profit for the year 2015 equal to $148.5 million.

The profits show an upward trend. This is mostly due to our efforts to grow our profits. This upward trend in profits is given in Figure 1.

Figure 1: Total profits for the given years

This growth in profits will not come without a correspoding increase in our revenues. The revenues are expected to grow continuously. The upward trend in our revenues for the time warp are given in Figure 2.

Figure 2: Total revenues for the given years

We have kept the contribution margin fixed at 40% of total revenues. This is our asssumption regarding our analysis and must be true as we will try to maintain this level of contribution margin. This means that given our changing revenues and our fixed contribution margin, it is clear that our variable costs will also fluctuate. Therefore, we find an upward trend in our variable costs. This trend is given in Figure 3.

Figure 3: Total variable costs for the given years

However, it is clear that the trend in our profits is greater and upwards than that in our variable costs. On the contrary we expect our ...