Mod 4 slp

Cost-Volume-Profit-Analysis and Pricing Strategy Robert Skipper Trident University Dr. Hascall Bus 599 Financial Analysis for Palm Inc for a 4-year Span Palm Inc is one of the leading players in telecommunication and computing technology market, owned by Hewlett Packard (HP). It provides high quality phones and touchpad devices with all new technological innovations and emerging features in today’s market. But the financial results of the company are consistently declining from the year 2006 to 2009. Just to give a brief overview of Palm Inc’s performance, it is crucial to highlight some major areas of the company’s cost bracket and revenue generation sources. Throughout the period mentioned, the cost burden from variable expenses decreased, showing good cost effective strategic applications in the business. However, the contribution margin or the gross margin has been decreasing from the year 2007 to 2009.  The reduction in costs clearly indicates the lesser revenues coming in over the years. The reason for such reduction in revenues is primarily the tough competition in the market, where technology plays a vital role in gaining the strategic fit; giving more control to the firm in terms of price flexibility and cost control. The graphs below will give a quick snapshot of Palm’s performance from 2006 to 2009.
From cost and profit analysis perspective, it can be declared that due to a sharp reduction in revenues, the costs and gross margin showed the same behavior as did the revenues. Profits for the company started reducing from 2006 to 2009 as with the arrival of new technological innovations and new communication concepts (Morningstar 2009). Strategies for Price and R&D Allocation with CVP Analysis Research and development is a crucial part of the entire budget, where the company focuses on its new markets and aim at the development of new products and services. From the above illustrations we can understand the relationship between the cost and profit, where revenues decrease and therefore reducing the cost and profit respectively. There is a direct relationship between the cost and volume or units produced (Sprinkle, Sivaramakrishnan, Balakrishnan 2008). Product discontinuation could be a wise strategy to reduce costs and bring up more sales from new offerings. For instance, consider the X6 PDA vis-à-vis Iphone 3GS or Samsung galaxy with Android, what could be the best purchase decision when it comes to the most featured and advanced technological Smartphone? Certainly the Iphone 3GS, because Iphone provides what X5 can’t with almost no difference in prices, so product discontinuation would be advised for X5 PDA. If we common size the income statement of Palm Inc for all 4 years the percentage allocation to R&D of its revenues is 8.63, 12.23, 15.37 and 24.08 percent from 2006 to 2009 respectively. The investments in research show an upward trend with respect to revenues, yet not very effective in maximizing sales and production. However, in 2009 the investments in R&D were lower standing at around $177.2 million than that of 2007 when it was over $190 million. Pricing is another key factor for profit maximization and cost reduction. Price plays crucial role in identifying the most receptive segment of the market. We will take some examples of Palm’s PDAs to propose a strategy for pricing with the help of cost volume profit analysis (CVPA). Cost Volume Profit Analysis and Pricing We consider that the only variable cost incurred throughout the 4-year span is the cost to R&D and we assume that the revenues are generated from PDAs only. The purpose of this analysis is to evaluate the price changes with respect to cost and sales volume. The analysis will be based on one product price and costs. We will take the example of Palm pre3 phone and the income statement for the year ended 2009. Price (S)Unit Va...