The Clipboard Tablet Co. has been selling three tablet models, namely: X5, X6 and X7 models to consumers since 2010. Analysis of the company shows that the performance has been remarkable especially in the years 2012 and 2013. From the CVP analysis, we see that the company has been performing well in selling different units of tablets in the last four years. In our current analysis, we make use of the CVP analysis from the years 2012 to 2015 to come up with an organizational strategy.
In this case, we look at strategies that ensure the company breaks even and makes profits based on sales, expenditure and creating a competitive advantage. Based on the CVP analysis, we notice that Clipboard Table Co. needs to realign its organizational strategy in the following sections in order to maintain a competitive edge:
Sales
The Company had been performing well in terms of selling tablets in the years 2012 and 2013. During these two years, the company realized revenues over $ 1.2 billion respectively and these boosted the company’s financial muscle. In terms of units sold, over 3.9 million units of tablets were sold and this was against the expected 1.7 million tablet units that the company needed in order for it to break even. However, the same scenario was not seen in the years 2014 and 2015.
This is because sales halved in the year 2014 with revenues dipping to $ 660mn compared to $ 1.24bn realized in the previous year. The decline in sales is a concern that the company needs to address with immediacy and as a result, the company’s best bet is to reduce the cost of its old tablet models of X5 and X6 (Drury, 2011).
This would boost sales as the company comes up with a measure of increasing revenues. The drop in sales might also be attributed to the low demand and ageing product line. However, the sales of X7 tablet have been on the increase and it is likely based on the CVP analysis that the tablet will meet the expected sales output in the year 2016.
Expenditure
CVP looks into the costs used in production of products with the aim of establishing the units/volumes that need to be sold. Clipboard Tablet Co. expenditure for the last three years from 2012 to 2015 has been high even though revenues were on the decrease drastically. For instance total costs for the company declined from $ 664mn in the year 2013 to $ 505mn in 2014. Yet, revenues in the same period declined by 50% and thus, this shows a high expenditure level for the company.
Expenditure should match production and revenues of a company and in the case of Clipboard there is a clear mismatch in terms of expenditure, revenue and production (Drury, 2011). For example, R&D costs have remained constant in the past with the company spending around $ 22 million on product development yet, no new products were launched.
The company’s expenditure should have been reduced drastically especially in the process of developing or marketing the X5 and X6 tablet brands. Moreover, the company from the CVP analysis spent around $ 26mn and $37mn on the development of the X7 tablet brand (Stice, 2010). This is little compared to the resources and efforts spent on marketing the less popular X5 and X6 tablets.
Production
The Clipboard Tablet Co.’s production in terms of units has been on the declined as shown by the CVP analysis. The company’s X5 and X6 tablets were in less demand in the years 2014 and 2015. The company had an expected production level of 3.65 million units in order for it to break even in 2014 and 2015. Nevertheless, in these two years, the company’s production levels dropped from 1.96 million units to 1.71 million units in 2014 to 2015 period.
Based on CVP analysis, these levels were 50% lower than the expected production levels. The production and sale of the X6 tablet was in particular the poorest performer (Stice, 2010). Since, the tablet declined from an output of 159% above the expected break-even point to a decline of 21.2% below the expected break-even point (Cafferky, 2010).
Despite being in the market for a period more than five years, the company spent around 28.9% of all costs on the production of the X5 tablet. This was in comparison to the 14.2% spent on the production of the X7 tablet which was more popular and had sold a lot of units within a short period. In terms of production costs, we are mostly interested in cost volume for production of one tablet. Therefore, in the year 2012, the company spent $ 98.36 for production of X5 and $ 194.6 for X6.
In 2013, expenditure on X5 decline to $ 84.2 per unit while that for X6 rose marginally to $ 196.4 per unit. This expenditure grew in the subsequent years with the company spending $ 145 for X5 and $ 260 for X6 tablets in the years 2014 and 2015 (Cafferky, 2010). These increases in costs were not consume-rate to the revenues and production level of tablets set by the company against demand.
Recommendations
The CVP analysis looked into the production, cost and sales figures for the Clipboard tablet Co.’s three tablets ranges of X5, X6 and X7. From the analysis, we can conclude that the company’s performance in the years 2014 and 2015 were dismal in terms of sales and thus the company has to come up with a new sales strategy. The company should reduce its sales price for its different tablets and it should increase the price of the X7 tablet in a move of recouping the costs while increasing revenue.
In relation to the X5 and X6 tablets, the company should reduce the costs of the tablets so that they can maintain demand for the tablets. Reducing the costs of the tablets will most likely increase sales and revenues. It would be prudent for the company to also launch new clone versions of the X6 tablet since this will assist in increasing the revenues for company (Cafferky, 2010).
Based on the CVP analysis, we notice that the units and volume of X5 and X6 tablets sold by the company have been on the decrease from the year 2012. The same has not applied for X7 tablets which recorded improved sales with the tablet increasing its sales volume for the past three years.
Pricing is important in realizing good sales and revenues and therefore, the company should devise a plan to sell the popular brands at high prices such as the X7. During the years 2012 and 2013, when the company realized massive profits, they should have re-invested 40% of the $ 1.32bn and 1.25bn profits.
One of the best methods of ensuring the performance of a company remains optimum and competitive is to have low expenditure rates in terms of production. The production of X5, X6 and X7 has been marked with high costs of production. For instance, the company should have probed the increase in cost of production per unit from $ 98.36 in 2012 to $ 145 for X5. The same applies to X6 tablet which had an increase from $ 194.6 in 2012 to $ 260 in the year 2015.
This increase is not in line with the principles of business which expect an increase in production costs to result in an increase in volumes/units produced (Drury, 2011). Expenditure on R&D should not have remained fixed at $ 22mn in the last four years since this hampers development of new products. Most of the R&D expenditure was not deployed in developing new tablets or improving the ones on sale.
Expenditure in the production and sale of X5 and X6 increased yet, the sales volumes of these units decreased; therefore, the company would have halted production of these tablets as a means of saving costs. Tentative measures should be taken in reducing production of X5 and X6 tablets with the aim of increasing sale of X7 tablets in the market.
This would ensure a lot of cost savings and increased demand for the production and sale of the X7 tablet model which is popular (Kinney, 2012). The company should also ensure that the new strategy is adopted within a short period of time so as to have a good turnaround effect.
References
Cafferky, M., & Wentworth J. (2010). Breakeven Analysis: The Definitive Guide to Cost-Volume-Profit Analysis in Business. London: McGraw Hill Publishing.
Drury, C. (2011). Management and Cost Accounting. Boston, MA: Routledge.
Kinney, M., & Raiborn, C. (2012). Cost Accounting: Foundations and Evolutions, 9th ed.: Foundations. Chicago, IL: John Wiley and Sons.
Stice, J., & Swain, M. (2010). Accounting: Concepts and Applications: Concepts and Applications. New York, NY: Lippincott Williams & Wilkins.