=+7-27 KK Life-cycle costing OBJECTIVE 5 Top Notch Ltd (TNL) has been manufacturing home furniture for over 40 years. Charles Strong, the owner, has decided he would like to manufacture an executive desk that contains space for not only a laptop dock but also an MP3 player dock. Based on his 292 Chapter 7: Cost management, capacity costing and capacity management M07_HORN3377_02_LT_C07.indd 292 2/09/13 3:41 PM experience with furniture, he believes the desk will be a popular item for four years, and then will be obsolete because technology will have changed again.

TNL expects the design phase to be very short, maybe four months. There is no R&D cost because the idea came from Charles, without any real research. Also, fixed production costs will not be high because TNL has excess capacity in the factory. The TNL accountants have developed the following budget for the new executive desk:

Fixed Variable Months 1–4 Design costs $700 000 —

Months 5–36 Production $9 000 $225 per desk Marketing 3 000 —

Distribution 2 000 $20 per desk Months 37–52 Production $9 000 $225 per desk Marketing 1 000 —

Distribution 1 000 $22 per desk The design cost is for the total period of four months. The fixed costs of production, marketing and distribution are the expected costs per month. Ignore time value of money.

Required 1 Assume TNL expects to make and sell 16000 units in the first 32 months (months 5–36) of production (500 units per month) and 4800 units (300 per month) in the last 16 months (months 37–52) of production. If TNL prices the desks at $500 each, how much profit will TNL make in total and on average per desk?