Product life-cycle costing and pricing Lodi Mining Products, Inc. makes bits for mining drills and undercutting machines. They have plans to make a new cutting bit that has the following unit standard manufacturing costs: Direct materials $15.00, direct labor $3.00, and manufacturing overhead $12.00. The company's policy has been to price products at 220 percent of standard product cost. With this policy, Lodi hopes to earn a profit of 10 percent above total product life-cycle costs.

Lodi management thinks this product will have a competitive sales life of 30 months and a product development period of 12 months. The company expects to sell 15,000 bits during the life of the product. Expected development costs include $100,000 of research and testing costs, $52,000 of bit design work, $35,000 of new production tooling, and $15,000 for design of a quality control system for this product. Up front advertising and marketing programs will cost $55,000 for the product, and sales commissions will be $4 per unit. Replacement bits, warranty repairs, and other customer services will be $75,000 for the product. Distribution cost is $32,000.

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REQUIRED a. Compute the price of the bits using the firm's old pricing policy. b. Compute the price of the bits using the product life-cycle costing approach and the company's product life-cycle profit goal.