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Case 3

Topic- CVP, Probabilities and Target profits

Nazmul Sajon ID 0520056 Anamul Haque ID 1125036 Kazi Forhen ID 0520149 Sayem Sadat ID 0530060 Khaled bin mahmud ID 0010199 Soud-Bin-Asrar ID 1110857

PROBLEM 1
Question 1 (a) For both pricing strategies calculate the probability of: A profit greater than 1,500,000 A profit of 0 (break-even) A profit greater than 4,000,000

A profit greater than 1,500,000 1st Strategy


Price = 170 Variable cost = 35 Fixed Expenses = 22,000,000

Fixed Expenses + Target Profit Unit Contribution Margin = Unit sold to achieve target profit

22,000,000 + 1,500,000 135 = 174,074 units

Recommendation

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. Probability of profit higher than1,500,000 is 0.3 because we need to sell the 180,000units at least to achieve profit higher than 1,500,000.

A profit greater than 1,500,000 2nd Strategy


Price = 190 Variable cost = 35 Fixed Expenses = 27,000,000

Unit sold to achieve target profit= Fixed Expenses + Target Profit Unit Contribution Margin 27,000,000 + 1,500,000 155 = 183,871 units

Recommendation

In order to achieve target profit of 1,500,000 need to sell 183,871 units so to achieve profithigher than we need to sell units more than 183,871.
So probability of profit higher than 1,500,000 is 0.1 because we need to sell the 200,000units at least to achieve profit higher than 1,500,000.

A profit of 0 (break-even)

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 = 180,000units)Standard deviation = 18,547 units.
Z=

174,194 180,000 18,547

= - 0.31

Recommendation

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

A profit greater than 4,000,00 1st strategy

Unit Contribution Margin= 135


Unit sold to achieve target profit=

Fixed Expenses + Target Profit Unit Contribution Margin 22,000,000 + 4,000,000 135 = 192,593 units units

Recommendation

In order to achieve target profit of 4,000,000 need to sell 192,593 units so to achieve profit higher than we need to sell units more than 192,593.
probability of profit higher than 4,000,000 is 0.1 because we need to sell the 200,000units at least to achieve profit higher than 4,000,000

A profit greater than 4,000,000 2nd Strategy

Unit Contribution Margin= 155


Unit sold to achieve target profit =

Fixed Expenses + Target Profit Unit Contribution Margin 22,000,000 + 4,000,000 155 = 200,000 units

Recommendation

In order to achieve target profit of 4,000,000 need to sell 200,000 units so to achieve profit higher than we need to sell units more than 200,000.
probability of profit higher than 4,000,000 is 0.1 because we need to sell the 210,000units at least to achieve profit higher than 4,000,000.

Problem 2

Assuming that the target profit for the new product is 4,000,000 discuss whether your answer to (1) helps managers choose between the two pricing strategies.

Answer to Problem 2
According to answer (1) managers will not be able to choose between two pricing strategy because

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.

Problem 3

Discuss how this techniques can be applied to a large multinational company with a wide range of products.

Answer to Problem 3
Whether this techniques can be applied to a large multinational company with a wide range of products or not? Factor should be considered

cost of advertisement increases the demand of product will increase. variable cost increases according to the demand of product fixed cost also increases according to the increased demand. The fixed cost must be same according to accounting standards fixed cost must be same.

Recommendation
If the company wants to gain more profit they must consider about

The fixed cost of product. If the fixed cost is balanced then this techniques can be applied to a large multinational company with a wide range of products. But if the fixed cost is increased as the advertising cost then it will be not a good idea to use this technique.

THANK YOU

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