Problem 11.20 Life-Cycle Cost Management and Terget Costing Nico Parts, Inc, produces electronic products with short life cycles Cof less than two yesrs). Development hes to be rapid, and the profitabilty of the products is tied strongy to the sbility to find designs that will keep producbion and logistics costs low, Recently, management has slso decided that post rehase costs arie important in dasi r decisions. Last mon propoaa er ne product as esented to management Th. to al market as rejected at 200,000 un forLhe t oryaar er d The proposed "ling price as si30 par unit. AL rice marketshaf. as expected to be 25 percenz. The manufscturing and Icgistics costs were estimated to be $120 per unit Upon reviewing the prcjected figures. Brian Metcalf, president of Nico called In his chief dezign engineer.ork willams, and hia marketing mansger, Cathy McCourt. The following conversation as reccrdedi BRIANI Made as you kno we agreed that a profit of S15 per unit l needed for this new product. A so as look at the projected markets are 25 percent isn't acceptable. Total profits need to be increased. Cathy hmst suggestons do you have? CATHYI Simple. Decrease the selling prike to $125 and e expand our market share to 25 percent. To increase total profits, however, we need some coat reductions as well BRIANI You're right. However, keep in mind that I do not want to earn a profit that s less than $15 per unt. MARKI Docs that $15 per unit factor in preproduction casts? You know we have already spent $100.000 on developing this product. To lower costs will require more expendhure on develapment BRIANI Gocd point. No, the projected cost of s120 does not Includec the $100.000 we have already spent. I do wanz a design that will provide: $15-per-unit profs, including cons deration of preproduction costz CATHY: might mention t at post purchase cost are important a ell. The current esgn w impose about $10 per unit for using maintaining and sping our product That's about the san e as our competitors f we can reduce that cost to about S5 per unit by desgning better product. we could pre bab y capture about so percent of the market I have ust comple ed ^ marketing survey at Mark K requ.at *n hrve ound ut that * current design has o eatures nat valued by stential customers Thes. tu" features havs Pro e tost c 56 per un However th-pre- consumer are willing to pay for th productthe same with or without the faaturQS. Required 1. Calculate the targat coat associated with the inita 25 parcant market chare. Dces the initisl design mest this target? Now calculate the totaf life-cycle profit that the current (intl) design offers (including preproduction costs), 2. Assum. that th. tve. F.ebures that "ra "Ppar-ntly not valued by consumers will b-uliminabed. Alas assum. that thselling price is loarered to 5125 . Calculate th-target cost for the $125 Prieand 35 percent market share. b. How much more cost reduction n&ad d? If required, round your answer to th& nearest cent. Enter your anawar as 0 va amount. er unit c, what are the total life-cycle profits now projected for the new preduct? d. Of th" thre" approaches that Nico n tak. to reduce ths preyected cost to thix now targ-t, which is th at likely to produce the cost reductier? 3. Suppose that the Engineering Depor ent has t o ne des gns: Design A 5 d Design Both designs e minate e t o nonva ed eatures Both oesigns s so educe production and ogist cs costs by an Jda on $8 per unit. Des on A however eaves post purchase cost, st $10 per unt while D sign B reducex post purchaxe cotx to S4 Per unk. Duislep and asting Design A costs an additi nal s150 000 while Design B cos additional 5300 000. Assuming Price c#3125 c.leule * th" total lifw cyc Frah x under-ach dex n. In your caiculations round p fit per unit to the nearest cant. Dasign A Which would you chooze? What if the design you chose coat an addinional S500.000 instead of $150,000 or $300.000? Would this have changed your decision? . Refer to Requirement 3. For every extra dollar spent on preproduction activities, how much benefit was generated? If required, round your answer to the nearest cent Problem 11.20 Life-Cycle Cost Management and Terget Costing Nico Parts, Inc, produces electronic products with short life cycles Cof less than two yesrs). Development hes to be rapid, and the profitabilty of the products is tied strongy to the sbility to find designs that will keep producbion and logistics costs low, Recently, management has slso decided that post rehase costs arie important in dasi r decisions. Last mon propoaa er ne product as esented to management Th. to al market as rejected at 200,000 un forLhe t oryaar er d The proposed "ling price as si30 par unit. AL rice marketshaf. as expected to be 25 percenz. The manufscturing and Icgistics costs were estimated to be $120 per unit Upon reviewing the prcjected figures. Brian Metcalf, president of Nico called In his chief dezign engineer.ork willams, and hia marketing mansger, Cathy McCourt. The following conversation as reccrdedi BRIANI Made as you kno we agreed that a profit of S15 per unit l needed for this new product. A so as look at the projected markets are 25 percent isn't acceptable. Total profits need to be increased. Cathy hmst suggestons do you have? CATHYI Simple. Decrease the selling prike to $125 and e expand our market share to 25 percent. To increase total profits, however, we need some coat reductions as well BRIANI You're right. However, keep in mind that I do not want to earn a profit that s less than $15 per unt. MARKI Docs that $15 per unit factor in preproduction casts? You know we have already spent $100.000 on developing this product. To lower costs will require more expendhure on develapment BRIANI Gocd point. No, the projected cost of s120 does not Includec the $100.000 we have already spent. I do wanz a design that will provide: $15-per-unit profs, including cons deration of preproduction costz CATHY: might mention t at post purchase cost are important a ell. The current esgn w impose about $10 per unit for using maintaining and sping our product That's about the san e as our competitors f we can reduce that cost to about S5 per unit by desgning better product. we could pre bab y capture about so percent of the market I have ust comple ed ^ marketing survey at Mark K requ.at *n hrve ound ut that * current design has o eatures nat valued by stential customers Thes. tu" features havs Pro e tost c 56 per un However th-pre- consumer are willing to pay for th productthe same with or without the faaturQS. Required 1. Calculate the targat coat associated with the inita 25 parcant market chare. Dces the initisl design mest this target? Now calculate the totaf life-cycle profit that the current (intl) design offers (including preproduction costs), 2. Assum. that th. tve. F.ebures that "ra "Ppar-ntly not valued by consumers will b-uliminabed. Alas assum. that thselling price is loarered to 5125 . Calculate th-target cost for the $125 Prieand 35 percent market share. b. How much more cost reduction n&ad d? If required, round your answer to th& nearest cent. Enter your anawar as 0 va amount. er unit c, what are the total life-cycle profits now projected for the new preduct? d. Of th" thre" approaches that Nico n tak. to reduce ths preyected cost to thix now targ-t, which is th at likely to produce the cost reductier? 3. Suppose that the Engineering Depor ent has t o ne des gns: Design A 5 d Design Both designs e minate e t o nonva ed eatures Both oesigns s so educe production and ogist cs costs by an Jda on $8 per unit. Des on A however eaves post purchase cost, st $10 per unt while D sign B reducex post purchaxe cotx to S4 Per unk. Duislep and asting Design A costs an additi nal s150 000 while Design B cos additional 5300 000. Assuming Price c#3125 c.leule * th" total lifw cyc Frah x under-ach dex n. In your caiculations round p fit per unit to the nearest cant. Dasign A Which would you chooze? What if the design you chose coat an addinional S500.000 instead of $150,000 or $300.000? Would this have changed your decision? . Refer to Requirement 3. For every extra dollar spent on preproduction activities, how much benefit was generated? If required, round your answer to the nearest cent