Advanced: Life cycle costing and learning curve. Fit Co. specializes in the manufacture of a small range of hi-tech products for the fitness market. They are currently considering the development of a new type of fitness monitor, which would be the first of its kind in the market. It would take one year to develop, with sales then commencing at the beginning of the second year. The product is expected to have a life cycle of two years, before it is replaced with a technologically superior product. The following cost estimates have been made.

Required:

(a) Calculate the life cycle cost per unit. (6 marks)

(b) After preparing the cost estimates above, the company realizes that it has not taken into account the effect of the learning curve on the production process. The variable manufacturing cost per unit above, of $40 in year 2 and $42 in year 3, includes a cost for half-an-hour of labour.

The remainder of the variable manufacturing cost is not driven by labour hours. The year 2 cost per hour for labour is $24 and the year 3 cost is $26 per hour. Subsequently, it.has now been estimated that, although the first unit is expected to take 0.5 hours, a learning curve of 95 per cent is expected to occur until the 1OOth unit has been completed.
Calculate the revised life cycle cost per unit, taking into account the effect of the learning curve.
Note: the value of the learning co-efficient,

b, is -O-0740005.
(10 marks)

(c) Discuss the benefits of life cycle costing. (4 marks)
ACCA F5 Performance Management

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Year 1 Year 2 Year 3 Units manufactured and sold 100000 200000 Research and development costs $160000 Product design costs $800000 Marketing costs Manufacturing costs: Variable cost per unit Fixed production costs Distribution costs: $1200000 $1000000 $1750000 $40 $42 $650000 $1290000 Variable cost per unit $4 $4-50 Fixed distribution costs $120000 $120000 Selling costs: Variable cost per unit $3 $3-20 Fixed selling costs $180000 $180000 Administration costs $200000 $900000 $1500000