case 3

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Case 3

Newcastle Division

Submitted by:

Ms. Riddhi Shah ID 5429245

Ms. Anussara Chaichana ID 5229256

Submitted to:

Dr. Jun Jiang

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Topic: CVP, Probabilities and Target profits

1.

For the First Strategy

Price = £170

Variable cost = £35

Fixed Expenses = £22,000,000

i) = Unit sold to achieve target profit

Unit Contribution Margin

22,000,000 + 1,500,000 = 174,074 units

135

In order to achieve target profit of £1,500,000 need to sell 174,074 units so to achieve profit

higher than we need to sell units more than 174,074.

So probability of profit higher than £1,500,000 is 0.3 because we need to sell the 180,000

units at least to achieve profit higher than £1,500,000.

ii) Break-Even point = Fixed cost ÷ Unit contribution margin

= 22,000,000 ÷ 135

= 162,963 units

Mean sales = 180,000 units (150,000+160,000+180,000+200,000+210,000 ÷ 5 = 180,000

units) Standard deviation = 18,547 units

Z= 162,963 – 180,000 = - 0.92

18,547

Using the standard normal table,

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If Y represents sales volume, then the probability of breaking even is

P(Y > 162,963) = P(Z > -0.92) = P(Z ≤ 0.92) = 0.82

So the probability for the profit of £0 ( Break-even ) is 0.82

iii) ) = Unit sold to achieve target profit


22,000,000 + 4,000,000 = 192,593 units

135





For the Second Strategy

Price = £190

Variable cost = £35

Fixed Expenses = £27,000,000

i) = Unit sold to achieve target profit


27,000,000 + 1,500,000 = 183,871 units

155

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ii) Break-Even point = Fixed cost ÷ Unit contribution margin

= 27,000,000 ÷ 155

= 174,194 units

Mean sales = 180,000 units (150,000+160,000+180,000+200,000+210,000 ÷ 5 = 180,000

units)

Standard deviation = 18,547 units

Z= 174,194 – 180,000 = - 0.31

18,547

Using the standard normal table,

If Y represents sales volume, then the probability of breaking even is

P(Y > 174,194) = P(Z > -0.313) = P(Z ≤ 0.31) = 0.623

So the probability for the profit of £0 (Break-even) is 0.623

iii) = Unit sold to achieve target profit


27,000,000 + 4,000,000 = 200,000 units

155



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2. According to answer (1) managers will not be able to choose between two pricing

strategy because for both the pricing strategy the probability of profit higher than

£4,000,000 is 0.1. So it will not help the manager to make the best decisions.

3. This technique is very much useful for large MNC’s specially the supplier point of view.

It includes the advertisement cost also. The marketing managers are very much sure that

if the cost of advertisement increases the demand of product will increase.

The above calculation shows that it’s absolutely right. But the point is that our variable

cost increases according to the demand of product that is fine because our demand of

product also increases but the error point is that our fixed cost also increases according to

the increased demand. The fixed cost must be same in every demand of X-units. Because

according to accounting standards fixed cost must be same.

If the company wants to gain more profit they must be confident about the fixed cost of

product and if the fixed cost of product increases according to the demand we should

reduce our variable cost, which is not possible otherwise it affect the quality and

standardization of products. Company must reduce the increased fixed cost or balance the

fixed cost, otherwise the increased demand doesn’t give any other abnormal profit or even

it decreases the normal profit and the strategy of investing more in advertisement will not

be the good idea for the company.

case 3

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