Southeast Equipment makes a variety of motor-driven products for homes and small businesses. The market research department recently identified power lawn mowers as a potentially lucrative market. As a first entry into this market, Southeast is considering a riding lawn mower that is smaller and less expensive than those of most of the competition. Market research indicates that such a lawn mower would sell for about €995 at retail and €800 wholesale. At that price, Southeast expects life-cycle sales as follows:

The production department has estimated that the variable cost of production will be €475 per lawn mower and annual fixed costs will be €900,000 per year for each of the 7 years. Variable selling costs will be €25 per lawn mower and fixed selling costs will be €50,000 per year. In addition, the product development department estimates that €5 millions of development costs will be necessary to design the lawn mower and the production process for it.

1. Compute the expected profit over the entire product life cycle of the proposed riding lawn mower.

2. Suppose Southeast expects pretax profits equal to 10 per cent of sales on new products. Would the company undertake production and selling of the riding lawn mower?

3. Southeast Equipment uses a target costing approach to new products. What steps would management take to try to make a profitable product of the riding lawn mower?

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