Case 3

Newcastle Division
Submitted by:
Ms. Riddhi Shah

ID 5429245

Ms. Anussara Chaichana

ID 5229256

Submitted to:
Dr. Jun Jiang

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,
If Y represents sales volume, then the probability of breaking even is
1

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

Unit Contribution Margin
22,000,000 + 4,000,000

= 192,593 units

135
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.
So probability of profit higher than 4,000,000 is 0.1 because we need to sell the 200,000
units at least to achieve profit higher than 4,000,000.

For the Second Strategy

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

= Unit sold to achieve target profit

Unit Contribution Margin

27,000,000 + 1,500,000

= 183,871 units

155
In order to achieve target profit of 1,500,000 need to sell 183,871 units so to achieve profit
higher 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 200,000
units at least to achieve profit higher than 1,500,000.

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

Unit Contribution Margin
27,000,000 + 4,000,000

= 200,000 units

155
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.
So probability of profit higher than 4,000,000 is 0.1 because we need to sell the 210,000
units at least to achieve profit higher than 4,000,000.

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 MNCs 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 its 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 doesnt 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.