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Cost volume profit analysis

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Cost volume profit analysis:

Kee (2007) provides that cost volume profit analysis shows the relationship between a product's revenue and cost functions and is used to examine financial implications as a result of various strategic and operational decisions. Phillips (1994) also states that cost volume profit analysis is an important tool in evaluating various circumstances such as carrying out break even analysis, determining marketing mix and evaluating pricing strategy. Cost volume profit analysis can be used in measuring a product's profit response to variations in one or more of its underlying parameters (Kee, 2007). CVP analysis is termed as a simple and helpful tool in making decisions relating to strategies and long run objectives.

Since turnover is represented by sale price multiplied by number of units then sales turnover increases with high sales volume and vice versa and also total cost increase with high sales volume. Since the tool relates to cost, volume and profit the formula is provided as follows; NP = Px - (a + bx) where NP is the net profit, P is selling price, x is units sold, a is fixed cost and b is variable cost per unit. We can use cost volume profit analysis to determine product price or cost required in order to attain set out profit levels.

2012:

The strategy for this year after carrying out cost volume profit analysis involved setting tablet price and research and development cost at desired levels. The strategy for tablet X5 involved pricing the product at $ 265 while allocation for research and development cost accounted for 33%. In tablet X6 the price was determined to be $ 420 while research and development allocation was 44%. Tablet X7 was priced at $ 190 and R&D allocation was 23%.

The strategy used for 2012 resulted in tablet X5 increasing total profit from $ 104,988,835 in 2011 to $ 143,922,711 in 2012 which and profitability increased from 26% to 29%. Revenue generated from sales, sales volume, and variable costs increased by a similar margin of 21% over the period. Research and development cost did not change in 2012. First time ...

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