River Line Corp. makes a variety of small home utility machines. The market research team recently identified snowblowers as a potentially lucrative market. As a first entry into the market the company is considering gas driven two-stage snowblowers that can remove heavy snow up to 20 inches deep. Market research indicates that snowblowers would sell for about $1,050 at retail and $950 wholesale. At that price River Line expects life cycle sales as follows:

The production department has estimated that the variable cost of production will be $610 per snowblower and annual fixed costs will be $900,000 per year for each of the seven years. Variable selling cost will be $45 per snowblower and fixed selling costs will be $75,000 per year. In addition, the product development department estimates that $5.3 million of development cost will be necessary to design the snowblower and the production process for it.

1. Compute the expected profit over the entire product life cycle of the proposed snowblower.

2. Suppose River Line expects a pre tax profit equal to 10% of sales on new products. Would the company undertake a production and selling of the snowblower? 

3. River Line uses a target costing approach to new products. What steps would management like take to try to make a profitable product of the snowblower?

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Year 2021 2022 2023 2024 2025 2026 2027 Sales 1,700 5,600 10,700 10,700 8,600 6,200 4,200