Life cycle product costing, activity-based costing. Destin Products makes digital watches.

Destin is preparing a product life cycle budget for a new watch, MX3. Development on the new watch with features such as a calculator and a daily diary is to start shortly. Destin expects the watch to have a product life cycle ofthree years. Estimates about MX3 are as follows:

Year 1 Year 2 Year 3 Units manufactured and sold 50,000 200,000 150,000 Price per watch $ 54 $ 48 $ 42 R&D and design costs $1,080,000 $120,000 —

Manufacturing:

Variable cost per watch $ 19.20 $ 18 $ 18 Variable cost per batch $840 $ 720 $ 720 Watches per batch 400 500 500 Fixed costs $ 720,000 $720,000 $720,000 Marketing:

Variable cost per watch $ 4.32 $ 3.84 $ 3.36 Fixed costs $ 480,000 $360,000 $360,000 Distribution:

Variable cost per watch $ 1.20 $ 1.20 $ 1.20 Variable cost per batch $ 144 $ 144 $ 120 Watches per batch 200 160 120 Fixed costs $ 288,000 $288,000 $288,000 Customer service costs per watch $ 2.40 $ 1.80 $ 1.80 Ignore the time value ofmoney in your answers.

Required 1. Calculate the budgeted life cycle operating income for the new watch.
2. What percentage ofthe budgeted product life cycle costs will be incurred at the end of the R&D and design stages?
3. An analysis reveals that 80% of the total product life cycle costs of the new watch will be locked in at the end of the R&D and design stages. What implications would this finding have on managing MX3’s costs?
4. Destin’s Market Research Department estimates that reducing MX3’s price by $3.60 each year will increase sales by 10% each year. Ifsales increase by 10%, Destin plans to increase manufacturing and distribution batch sizes by 10% as well. Assume that all variable costs per watch, variable costs per batch, and fixed costs will remain the same. .Should Destin reduce MX3’s price by $3.60?