Managing costs

Chan Yung Bike limited produces environmentally friendly e-bikes for its local and international markets. The design department is currently working on two potential product lines: Standard and Deluxe models. The marketing department of Chang Sung Bike has recommended that the company should introduce the Deluxe model. To compete effectively with existing models offered by other companies, the Deluxe would need to be priced at $800. The company requires a target profit margin for all new products of at least 40 per cent of sales. The technology in solar energy is developing rapidly, and therefore the Deluxe is expected to be obsolete within three years of entering the market. Initial estimates of the Deluxes cost of manufacture per unit are:

And prepare a life cycle budget for the Deluxe that covers each year from year 1 to year 5. Based on your calculation, would you recommend the development and introduction of the Deluxe model

Direct material $ 200 Direct labour 100 Manufacturing overhead" 100 $400 * Manufacturing overhead is applied at 100 per cent of direct labour cost. The marketing department is keen to introduce the Deluxe 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 Deluxe. He receives the following information: Estimated costs associated with the proposed Deluxe (in $'000s) Department Year 1 Year 2 Year 3 Year 4 Year 5 Research and development 900 Product and process design 1,800 420 Marketing 600 400 240 Customer support 150 480 450 120 480 The forecast sales of the Deluxe are as follows: Year 2 3,000 units Year 3 4,500 units Year 4 1,500 units Required: Question 2.1 Calculate the target cost for the Deluxe that will meet the target selling price of $1,920 and the target profit| margin of 40 per cent on sales. Based on your calculation, would you recommend the development and introduction of the Deluxe model? Explain. Direct material $ 200 Direct labour 100 Manufacturing overhead" 100 $400 * Manufacturing overhead is applied at 100 per cent of direct labour cost. The marketing department is keen to introduce the Deluxe 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 Deluxe. He receives the following information: Estimated costs associated with the proposed Deluxe (in $'000s) Department Year 1 Year 2 Year 3 Year 4 Year 5 Research and development 900 Product and process design 1,800 420 Marketing 600 400 240 Customer support 150 480 450 120 480 The forecast sales of the Deluxe are as follows: Year 2 3,000 units Year 3 4,500 units Year 4 1,500 units Required: Question 2.1 Calculate the target cost for the Deluxe that will meet the target selling price of $1,920 and the target profit| margin of 40 per cent on sales. Based on your calculation, would you recommend the development and introduction of the Deluxe model? Explain