Life cycle costing

Q1.Co X are in a high tech industry and are often first to market with new technological advances. They have recently spent $500,000 designing and developing a new product. The new product is expected to have an eighteen month life cycle.

The anticipated performance of this product is as follows:

	Introduction	Growth	Maturity	Decline
Sales volume (units)	4,000	9,000	30,000	10,000
Per unit ($)
Selling price	599	549	449	349
Variable cost	249	249	199	149
Overhead	100	100	60	75

Required

Calculate the profitability of the new product.

2. A company is planning a new product. Market research suggests that demand for the product would last for 5 years. At a selling price of $10.50 per unit they expect to sell 2,000 units in the first year and 12,000 units each of the other 4 years.

The company wishes to achieve a markup of 50% on cost.

It is estimated that the lifetime costs of the product will be as follows:

Manufacturing costs - $6.00 per unit

Design and development costs - $60,000

End of life costs - $30,000

Calculate:

(a) The target cost for the product.

(b) The life cycle cost per unit and determine whether or not the product is worth making.

3. The following costs have arisen in relation to the production of a product:

(i) Planning and concept design costs

(ii) Testing costs

(iii) Production costs

(iv) Distribution and customer service costs.

In calculating the life cycle costs of a product, which of the above items would be included?

A (iii) only

B (i), (ii) and (iii) only

C (i), (ii) and (iv) only

D All of the above

4. SNT is a Japanese electronics giant specialising in the production of game consoles. SNT is planning to introduce the latest next-generation console and range of games in the summer of 2015. Development of the new console is due to commence on January 1, 2015 and SNT is currently working out at what price the new console should be sold then. The new console is expected to incur the following costs in the four years it will be developed and commercialised:

2015 2016 2017 2018

Consoles manufactured and sold 10,000 12,000 11,100 3,000

R&D costs $950,000 $0 $0 $0

Marketing costs $230,000 $120,000 $20,000 $5,000

Production cost per console $450 $430 $290 $290

Warranty costs per console $30 $30 $40 $45

End of life costs $0 $0 $0 $125,000

Using lifecycle costing, what is the cost per console?

A $410.21

B $417.56

C $455.35

D $496.62