LUXMY Ltd (LXY) has been producing home furniture for over 40 years. Ananda Silva, the owner, has decided he would like to manufacture an executive desk that contains space for not only a laptop dock but also an MP3 player dock. Based on his experience with furniture, he believes that the desk will be a popular item for four years, and will then be obsolete because technology will have changed again. LXY expects the design phase to be very short, maybe four months. There is no R&D cost because the idea came from Ananda, without any real research. Also, fixed production costs will not be high because LXY has excess capacity in the factory. The LXY accountants have developed the following budget for the new executive desk: Fixed Variable Months 14 Design costs $700 000 __ Months 536 Production Marketing Distribution $9 000 3 000 2 000 $225 per desk __ $20 per desk Months 3752 Production Marketing Distribution $9 000 1 000 1 000 $225 per desk __ $22 per desk The design cost is for the total period of four months. The fixed costs of production, marketing and distribution are the expected costs per month.

Required

Ignore the time value of money.

1. Assume that LXY expects to make and sell 16 000 units in the first 32 months (months 536) of production (500 units per month) and 4800 units (300 per month) in the last 16 months (months 3752) of production. Determine the total life cycle operating profit that LXY make and an average operating profit per desk, assuming LXY prices the desks at $500 each

2. Suppose that LXY is wrong about the demand for these executive desks and after the first 36 months stops making them altogether. It sells 16 000 desks for $400 each with the costs described for months 536 and then incurs no additional costs nor generates additional revenues. Determine the new total life cycle operating profit and comment on whether this have been a profitable venture for LXY.

3. If LXY must nevertheless incur the estimated fixed production costs for the whole period to month 52, even if LXY stops making executive desks at the end of 36 months, will your answer to requirement 2 above change? Comment with supporting calculations.