CVP Analysis
The best way to approach this situation is to understand some basic concepts. First, each product has fixed costs. Thus, the fixed costs are going to exist in every year a product is sold. This has ramifications for the X5 in the final year.
The second factor that needs to be considered is cost-volume-profit analysis. This technique is used to determine the contribution to fixed costs that each product makes. Thus, CVP is used to find the price point at which the profit is maximized. The key point to remember is that as the price falls, volume increases. The company cut sell all the product by cutting the price to the variable cost level, but that will not deliver any profit. But there is a point at which profit is going to be maximized, and that is the point at which the company should price each product. Then, the only decision left to make will be with respect to the R&D investment.
Strategy
The X5 is selling well, and the X6 is entering into the growth phase. The X7 is launching and it is important to build market share quickly with that product. The more it sells, the better the bottom line will be. It is a high-volume, low margin product. The strategy utilized over the four years is as follows:
Year by Year Decisions: Pricing & R&D Allocations
PRODUCT
DECISION
2011
2012
2013
2014
2015
X5
Price
$250
$195
$195
$195
R&D %
33%
0%
0%
0%
0%
Discontinue?
NO
NO
NO
NO
YES
X6
Price
$340
$340
$340
$340
$340
R&D %
34%
34%
34%
0%
0%
Discontinue?
NO
NO
NO
NO
NO
X7
Price
$195
$120
$120
$120
$120
R&D %
33%
66%
66%
75%
Discontinue?
NO
NO
NO
NO
NO
2012
The...
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