Phones R Us Limited is a manufacturer of mid-range smart mobile phones. The technology changes rapidly and there is intense competition from other manufacturers. As a result, product lifecycles are short. The Companys research and development (R & D) unit is carrying out design work at present on a new type of mobile phone. It is estimated that the total R & D costs for the phone will amount to 180,000. Once the product enters the production and sales phase of its lifecycle, it is estimated that the manufacturing cost per unit will be 50 and the selling price of each phone cam will be 117.00. It is estimated that a total of 12,000 mobile phones will be sold before demand for the product ceases. After that, the Company will incur 90,000 end-of-life costs in dismantling and removing the production facilities used to manufacture the mobile phones. The Company makes use of target costing and lifecycle costing in managing its product portfolio. A markup of 30% on cost from all new products is required.

Required:

(a) Assume that, by increasing its R & D expenditure on the mobile phone by 15% the Company will achieve a 42% reduction in the end-of-life costs, together with an as-yet unspecified reduction in the manufacturing cost per unit. The sales volume or price will not be affected. Prepare calculations to show what size of reduction in the manufacturing cost per unit would enable the division to achieve the required markup.