A plc sells a wide variety of energy drinks. They are planning to make a new energy drink called ACTIVE which has the potential to keep its consumer wide awake and active for longer hours than other energy drinks sold in the external market. Market research has shown that 600,000 bottles of 750ml ACTIVE can be sold over a five-year period. It is estimated that certain costs will be incurred at different stages of the products life cycle as shown below:

a. What is ACTIVEs life cycle cost per bottle?

b. Market research has also shown than ACTIVE may likely sell at 10.00 per bottle. Comment on whether it is worth making ACTIVE.

c. The management accountant has proposed the use of target costing for ACTIVE. It has been agreed that a profit margin of 50 % will be applied. If the target cost is considered in the decision-making, should they still produce ACTIVE? Comment on your results (you are not required to prepare a revised cost schedule).

\begin{tabular}{|l|l|l|l|l|l|} \hline & Year 1 & Year 2 & Year 3 & Year 4 & Year 5 \\ \hline Researchanddevelopmentcosts(m) & 2 & & & & \\ \hline Production costs ( per bottle) & 1.50 & 1.00 & 0.80 & 0.80 & 0.60 \\ \hline Productionvolume(750mlbottlesofACTIVE) & 50,000 & 100,000 & 200,000 & 180,000 & 70,000 \\ \hline Marketinganddistributioncosts(m) & 0.78 & 0.50 & 0.25 & 0.3 & 0.1 \\ \hline Customer service costs (m) & & 0.03 & 0.05 & 0.07 & 0.19 \\ \hline \end{tabular}