Life cycle costing; manufacturer Ellipsis Electronics Ltd produces speakers for high-fidelity sound systems. Because of the rapid rate of technological innovation in the hi-fi market, most of the company's products have short life cycles. The marketing manager, Jean Wills, believes that new product introductions are the key to Ellipsis's success. However, the managing director, Joseph lacopetta, is concerned that the frequent changes in product lines are eroding the company's profitability. He believes that many of the new products have such short life cycles that they never fully recover their costs. He asks the management accountant, Stan Willox, to help him. Willox decides to review the profitability of the Easy-Ear speaker system (EESS), which has just been phased out after only three years on the market. First, Willox prepares an analysis of the profitability of the EESS: Year 1 Year 2 Year 3 Sales revenue $75000 $142 500 $52 500 Less Cost of goods sold: Direct materials 15000 28 500 10 500 Direct labour 7500 14250 5250 Applied manufacturing overhead 11 250 21375 7875 * The company uses a JIT system, which means that inventories are minimal and all manufacturing costs flow directly to cost of goods sold. In addition to these manufacturing costs, Willox is able to isolate the following costs associated with the EESS: Year 1 Year 2 Year 3 Year o $17000 10000 15000 20000 8000 S5000 Research and development Product design Process design Tooling costs Marketing costs Warranty claims After-sales service $3000 12000 6000 $8000 1000 10000 4000 5500 3000 2000 Required: 1. Assess the profitability of the EESS in years 1, 2 and 3, including only the manufacturing costs. 2. Assess the profitability of the EESS based on its life cycle costs. 3. Given this information, what action should lacopetta take when considering future products? 4. Discuss the advantages and disadvantages of developing life cycle budgets for proposed new products. 5. What other performance measures might the company introduce to manage its new product development more effectively