Case: Outputs Diagnosis, SLP: Time Warp 3
The table below shows that the company has three products, X5, X6 and X7. The main idea is to make decisions whether to continue the production of the three products or to discontinue. In addition, the is needed to determine the changes to make on the prices, R&D costs and other strategies of the product. The product life-cycle determines the strategies to be applied. The three stages of the product life cycle are the growth, shakeout and maturity stage.
Year by Year Decisions: Pricing & R&D Allocations
R&D % 33%
R&D % 0
R&D % 0
Source: Forio (2012).
R&D = 33%
Fixed Costs = $70,000,000
Variable Cost/unit =$140. 00
At the breakeven point, the target profit = 0
The price for X5 = $250.00
The breakeven Volume = 696,364
Using Volume = 700,000
The Price will be = $249.43
This means that for the business to break even, at a price of $250, the management should sell 696,364 units. On the other hand, if the company sells 700,000 units, the price should be $249.42 for the business to break even. Alternatively, if the management wants to get a profit of $20,000,000, the company should sell 878 units at a price of $250. Or if the company sells 700, units, the selling price should be $278.00. Product X5 has been in the market for 3 years, and has attained the maturity stage. The consumers are sensitive about the prices of the product. Therefore, the management should not increase the R&D costs to avoid making losses. This will help develop better adverts and promotional strategies. However, the management should discontinue the production of X5 in 2014 because it will not be profitable to continue with the production.
R&D% = 34%
Fixed Costs = $70,000,000
Variable Cost/unit = $140.00
To break even, target profit = 0
Price = $400
The breakeven volume = 295,385
With a volume of = 300,000
The break even price is = $396.00
This means that, to break even, with a price of $400, the company should sell 295,385 units. Or, if the company sells 300,000 units, the price needs to be $396.00 to break even. To obtain a profit of $20,000,000, at a price of $400, the company should sell 372,308 units. Or if the company sells 300,000 units, the price should be $462.67. The product X6 has been in the market for 2 years, and this indicates that the customers are still adapting to the product. Therefore, the company should conduct intensive promotion to ensure that the customers readily accept the product. The company should continue with the production of the product in 2013, 2014 and 2015. The company should increase the prices from $400 to $425 in 2014 and 2015. Increasing the prices will increase the profits made by the company for the production of the commodity. In addition, the R&D costs should be reduced to ensure that the company makes maximum profits. Reducing the costs in 2014 will be important because the product will have dominated the market, and lower promotional costs will be incurred. The product has penetrated the market but not all the customers have accepted it. The management should conduct intensive campaigns to promote the product so that all customers can readily accept it. This will create more profits for the company. The cost of production should be minimized so that the company can make maximum profits from the sale of the product. This will improve the performance of the company.
The product X6 is at the Shakeout stage of the product life-cycle. This indicates that the company should conduct intensive promotion and promotion to attract as many customers as possible. The company should aim at reaching all the potential customers. In addition, the company should encourage the customers to buy the products in future. Creating customer loyalty helps the company to have a large pool of customers (Lamb, Hair & McDaniel, 2009).
Fixed Costs = $70,000,000
Variable Cost/unit= $250
For breakeven, the target profit = 0
The price is = $200.00
The break even volume is = 1,273,333
With the volume 700,000 units, the breakeven price is = $249.00
This means that to break even at profit = 0, with a price of $200.00, the business should sell 1,273,333 units. Or, if the company sells 700,000 units, the price should be $249.14 to break even. Or, if the company sells 700,000 units, the price should be $277.71. Suppose the company wants to make a profit of $20,000,000, at a price of $200, 1,606,667 units should be sold. The product has been in the market for one year, and the company should conduct intensive promotion to popularize it. The company should aim at attracting all potential customers in the market. The company should continue with the production of the product. The prices of the product should be increased from $200 to $210 and $2020 in 2015. In addition, the R&D costs should be reduced to ensure that the company makes maximum profits. Reducing the costs in 2014 will be important because the product will have dominated the market, and lower promotional costs will be incurred. Product X7 has just been introduced in the market, and there is a lot of potential for growth. The management should increase the prices when the customers accept the product. The price should be constant in the initial stages. This will allow the customers to accept the product. When the company gains consumer loyalty from the customers, the prices can be increased. As such, the customers will not fear the paying a premium price for the product because they are aware of the quality (Hayes, 2008).
X7 is in the growth stage, and there is a need to conduct market awareness. This can be achieved by promoting and advertising the product. The product is sold to first-time customers, and there is a need to encourage the customers to buy the product in future. Creating customer loyalty is the major strategy of the company for this product. This will help create a large number of customers, and the sales of the company will increase (Netmba 2012).
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