13-20 Life-cycle product costing. (LO 6)Digital Arts Inc. manufactures game systems. Digital Arts has decided to create and market a new system with wireless controls and excellent video graphics. Digital Arts's managers are thinking of calling this system the Yew. Based on past experience they expect the total life cycle of the Yew to be four years, with the design phase taking about a year. They budget the following costs for the Yew:

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The table is as follows.

Blank	Blank	Total Fixed Costs over Four Years	Variable Cost per Unit
Year 1	Research and Development costs	$ 7,200,000	Nil
Blank	Design costs	1,700,000	Nil
Years 2 to 4	Production	21,000,000	$30 per unit
Blank	Marketing and distribution	6,200,000	10 per unit
Blank	Customer service	2,400,000	Nil

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1. Suppose the managers at Digital Arts price the Yew game system at $80 per unit. How many units do they need to sell to break even?
2. The managers at Digital Arts are thinking of two alternative pricing strategies.
   1. Sell the Yew at $80 each from the outset. At this price, they expect to sell 1,600,000 units over its life cycle.
   2. Boost the selling price of the Yew in year 2 when it first comes out to $95 per unit. At this price they expect to sell 1,000,000 units in year 2. In years 3 and 4 drop the price to $80 per unit. The managers expect to sell 300,000 units in years 3 and 4 (225,000 in year 3 and 75,000 in year 4).Which pricing strategy would you recommend? Explain.
3. What other factors should Digital Arts consider in choosing its pricing strategy?

Check Figure: 1. BEP in units, 962,500