MBA Interactive Project Essay
Essay Topic: Cost
Paper type: Project
Words: 1168, Paragraphs: 22, Pages: 5
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Continuing the work and analysis begun in the first three SLPs, we again project ourselves back in time to the year 2012. I am in responsible for decisions on product development and pricing for the next four years for our line of tablets. I will show the score, financials and market data at the end of the four year period from my previous time discussions. Finally we can make a detailed discussion and analysis of the data using CVP analysis, and will explain why I recommend specific pricing and research and development (R&D) costs for the next four year period.
The Clipboard Tablet Company is currently making three different tablet models; the X5, X6 and X7. The X5 has been on the market for three years already and market research has determined that consumers are not very worried about performance for this older tablet. The middle tablet, the X6, has been on the market for two years and market research shows consumers are concerned about performance but not necessarily price.
The final tablet, the X7, is the newest and has only been on the market for one year, and market research shows the consumer is interested in both performance and price. With this in mind, we can analyze how the products evolved when Mr. Shmoe was in charge.
The following table depicts the price and R&D percentage for each tablet over the preceding four years (since the last run) and whether or not the particular tablet production was discontinued or not. The graphs also depict the revenue generated and profit from the different tablets over the time period I was in charge of making the decisions instead of Mr. Shmoe.
Overall the results of the third run of the tablet simulation had an end result which was approximately $142 million greater than the previous run, which was accomplished using CVP analysis. This change was due to two reasons. The first was the increased sales and revenue generated by the X6 tablet, ultimately reaching market saturation. The second reason was due to the dramatically increased sales of the X7. As the graphs display, the X6 accelerated greatly in terms of revenue and profit through 2013 and then began a steady and definite decline once reaching market saturation. Revenue and profit for the X7 were drastically different as compared to previous simulations, beginning to increase in 2014 and 2015,and setting the stage for sustained revenue and profits in the future time period. The X5 was relatively unchanged from previous simulations since I left the pricing alone due to the tablet having been on the market for several years already.
It will also help to discuss in more detail what happened in the third simulation under my supervision while using the CVP model. For the X5, initial R&D allocation of the $24 million available was only 5%, or $1.2 million, plus the $75 million in other fixed costs gave a total fixed cost of $76.2 million. The variable cost per unit for the X5 amounts to $150, and using a price of $300 per tablet, the breakeven point for the X5 is 508,000 units sold. A price of $300 per tablet yielded a profit of $119 million. Fixed costs for the X5 are extremely high and with the age of the X,5 little R&D dollars were allocated in order to keep the total fixed costs down.
Next up, the X6’s fixed costs were $48.3 million including the R&D costs, while the variable cost of the X6 came out to $275 per tablet. The breakeven volume for the X6 priced at $375 per tablet comes out to 375,000 tablets. The idea here was to achieve market saturation as quickly as possible and reap the associated profit. Based on the life cycle of the X6, the price was increased by only five dollars per year and associated R&D expenses were reduced only 5% in the latter years.
Finally, the X7 has the exact same fixed cost as the X6 with the only difference being the dollars allocated for the R&D, which for the second run of the simulation was $49.5 million. However, the variable costs for the X7 are extremely low at only $55 per tablet. The breakeven volume for the X7 at $120 per tablet comes out to just under 577,000 tablets. The strategy here was to have a much lower initial price in an attempt to capture market share and volume upfront which would ultimately reap large profits after the breakeven point.
Formulating a revised strategy
Considering all of this information, the revised strategy will be somewhat similar from the previous one in regards to the overall conceptual plan. My previous strategy focused on CVP analysis, while the newer revised strategy for the tablet simulation will attempt to tweak and optimize this strategy further. Due to the lower breakeven prices of each of the tablets, volume for each one can be increased immediately by a reduction in price. Therefore we will attempt this for the X6 and X7 tablets. CVP does not account for product lifecycle, however, which is why my strategy is to more or less leave the pricing the same for the X5 as the previous run. R&D for the X5 will never increase above 1% since the consumers don’t care for this feature, while R&D will be the highest for the X7, which is marketed as the primary benefit of this higher-performance tablet.
Prices for the X6 and X7 will increase by $10/year while maintaining roughly a 40-60 R&D split respectively, with the beginning price of the X7 starting $10 lower. This strategy should show higher profits after four years by keeping prices closer to their breakeven CVP pricing and varying slightly the R&D costs based on changing market saturation. To sum up the strategy, it is to more or less leave the X5 and X6 fairly constant from my previous simulation but attempt to increase overall sales in the X7 market, thus creating more revenue and profit.
The following table depicts the results of the updated strategy for the next four years. As you can see we left the initial pricing for the X6 the same, starting out with a price of $375.
In conclusion, we generated a revised strategy for the Clipboard Tablet Company based on a revised and optimized CVP analysis. By adjusting the pricing for the X7 slightly downward in order to increase sales and revenue/profit, we maximize the outcome. The goal is to continue reap the profits out of the X5, get maximum revenue off of the X6 by achieving market saturation and to dramatically increase sales of the X7 which is the future for our company. I look forward to putting this into practice.
Forio.com, 2012. “Introduction.” PDA Simulator. Retrieved 09 Jan 2013 from: http://forio.com/simulate/jelson/tablet-development-sim-1/simulation/#p=page1 Manoski, Paula, 2002. “The R&D strategy/strategic process Part 1: a road map to R&D effectiveness.” Allbusiness.com, Retrieved 09 Jan 2013from: http://www.allbusiness.com/sales/customer-service-product-knowledge/122484-1.html
QuickMBA.com, 2010. “Product Lifecycle.” Retrieved 13Jan 2013 from: