Life-cycle product costing, activity-based costing. Destin Products makes Bee cet ae digital watches. Destin is preparing a product-life-cycle budget for a new watch, PSE Dabicions ast Coat 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 of three years.

E Estimates about MX3 are as follows:

REQUIRED (Ignore the time value of money in your answers.)
1. Calculate the budgeted life-cycle operating income for the new watch.
2. What percentage of the 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 $3.50 each year will increase sales by 10% each year. If sales increase by 10%, Destin will increase the batch size for manufacturing in year 1 by only 10%. 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 $3.50?LO1

Transcribed Image Text:

Year 1 Year 2 Year 3 Unitsmanufactured and sold 50,000 200,000 150,000 Price per watch S 55 $ 50 $ 45 R&D costs $1,200,000 $150,000 $ 0 Manufacturing costs: Variable cost per unit S 20.00 $ 18.00 $ 18.00 Variable cost per batch $ 860 Watches per batch 400 $ 750 500 $ 750 Fixed costs $ 800,000 $800,000 Marketing: Variable cost per watch $ 4.20 $ 3.75 500 $800,000 $ 3.50 Fixed costs $ 400,000 $320,000 $320,000 Distribution: Variable cost per watch $ 1.50 $ 1.50 $ 1.50 Variable cost per batch $ 160 $ 200 $ 150 Watches per batch 200 160 150 Fixed costs Customer-service costs per watch $ 300,000 $300,000 $300,000 $ 3.00 $ 2.40 $ 2.00