Life cycle budgeting; life cycle management; target costing: manufacturer LO 16.4 Q. 16.50 The marketing department of Bream Hot Water Ltd has recommended that the company introduce a new solar hot water system, to be called the Sunstruck. To compete effectively with existing models offered by other companies, the Sunstruck would need to be priced at $1 600. The company requires a target profit margin for all new products of at least 30 per cent of sales. The technology in solar energy is developing rapidly, and therefore the Sunstruck is expected to be obsolete within three years of entering the market. Initial estimates of the Sunstruck's cost of manufacture per unit are:

Direct material                                   $ 500

Direct labour                                         250

Manufacturing overhead                    250

                                                           $1 000

*Manufacturing overhead is applied at 100 percent of direct labour cost.

The marketing department is keen to introduce the Sunstruck as soon as possible. However, the management accountant is concerned about the non-manufacturing costs likely to be associated with the new product. He asks the departments that are upstream and downstream of manufacturing to estimate the costs in their departments associated with the development, production and sale of the Sunstruck. He receives the following information:

Required: 

1. Calculate the target cost for the Sunstruck that will meet the target selling price of $1 600 and the target profit margin of 30 per cent on sales. Compare this with the estimated manufacturing cost. On this basis, would you recommend the development and introduction of the Sunstruck model?

2. Prepare a life cycle budget for the Sunstruck that covers each year from year 1 to year 5.

3. What is the estimated average unit cost of the Sunstruck over its entire life cycle? On this Page 801 basis, would you recommend the development and introduction of the Sunstruck model?

4. Explain how Bream could use life cycle management to reduce the manufacturing cost of the Sunstruck solar hot water system. Which part of the value chain may warrant additional expenditure? Explain.