Profits for one of Company X's flagship products have been declining slowly for several years. The CFO investigated and determined that inflation has raised the cost of producing the product but consumers who were surveyed reported that they felt the product’s functionality didn’t justify a higher price. As a result, the CFO recommended that the company stop producing this product because the CEO only wants products whose profit margins are increasing.
The answer to which of the following questions would be most useful in evaluating whether the CFO's decision to divest the company of its flagship product is warranted?
A Does the company have new and profitable products available with which to replace the flagship product?
B Will the rest of Company X's management team agree with the CFO's recommendation?
C Can Company X sell the flagship product to new markets to increase its customer base?
D Are there additional features that could be added to the product without raising the unit price?
E What percentage of Company X's revenues is represented by sales of the flagship product in question?
The CFO wants to withdraw this product as the CEO wants only those products whose profit margins are increasing.
Profit margin= Profit/Revenue per unit of the product.
Sp->Selling price of the product
CP->Cost price to produce the product
I am not sure what unit price means in choice D. Does it mean the cost of production to the company or the cost to the buyer in the market?
Unit price should generally mean cost of the product in the market i.e the SP from the manufacturer's side.
Let us take this scenario:
SP CP Profit margin Sales Net profit Year
200 100 0.5 100 10000 1
200 120 0.4 100 8000 2
200 142 0.29 100 5800 3
272 170 0.6 50 5050 4So, assuming that the costs of production go up by 20% each year, and that the manufacturer cannot increase his selling price, for he fears that he will lose sales, we can see that the profit margins continue to fall(in the first three years)
In the case that the manufacturer does increase his selling price to counter the loss in profit margins, the people will stop buying his product as they feel that spending so much for the features on offer is not worth their money.
So, if the CFO wants to increase his margins, he must only reduce his internal manufacturing cost or add new features to the product(without increasing his own production cost) so that he can command a higher price for his product.Case 1: unit price=cost of production
If he is able to add new features to this product,without adding on his own costs, and people are willing to spend more for those new features, then this plan will be a success. In this case , maybe the year 4 scenario will not happen.
The CFO will probably be able to increase the profit margins, and everyone is happy(including me).Case 2:
unit price=cost to buyer or selling price from the manufacturer
Now, if unit price is kept constant(i.e the his selling price), then perhaps his sales will go up , but how will his margins increase?
In this scenario, I see no difference between choice C and D.
In the end, it all boils down to the trivial matter of what unit price means in this context. In hindsight, maybe it was too obvious.But , that was what made me choose choice C.
In my knowledge unit price has always meant the price that a product sells for.
If, choice D had said, the unit price of production, then it would have been a clear picture.
Please help me with this.