QUESTION 1

The Computing Division was launched just over a year ago, with the intention that it would manufacture and sell small electronic devices (such as USB memory sticks and electronic pointers) in the first instance but that operations might later extend to the importation and customization of hardware. Because of rapid technological and market changes, product lifecycles are short. Before launching any product, the Computing Division carries out any necessary research and development (R & D) work and then forecasts the product's profitability over a three-year product lifecycle. A net profit ratio of 10% in each year of the product lifecycle is required (before taking account of the cost of the R & D work).

The R & D work for a new electronic pointer has just been completed at a cost of $180,000. Variable production costs per unit are forecast as $2 in Year 1, increasing at a rate of 10% per annum thereafter. Fixed production costs are forecast as $140,000 per annum, and step-fixed production costs each year are forecast at $50,000 per 100,000 units produced (or part thereof). The selling price per unit is forecast to be $4.50 per unit in Year 1; it is expected to increase by 4% at the beginning of Year 2 but is not expected to increase thereafter.

In the first year, sales are forecast at 150,000 units and there will be heavy marketing expenditure (estimated at $80,000) aimed at strengthening the market position of the product. Sales are forecast at 210,000 units in Year 2, and marketing costs in Year 2 are expected to decrease to $70,000. As Year 3 is expected to be the final year of the product's lifecycle, it is forecast that marketing costs will be reduced to $10,000 and sales will be just 100,000 units. All units are expected to be sold in the same year as production takes place.

YOU ARE REQUIRED TO:

(a)Analyze the profitability of the new electronic pointer over its three-year product lifecycle (by year and in total) and assess whether approval is likely to be given for

the launch of the product.(10 marks)

(b)Critically evaluate the advantages and limitations of lifecycle costing to the Computing Division in managing potential new products, using the example of the

new electronic pointer to illustrate your answer.(8 marks)

(c)A major new initiative is planned for the Computing Division next year. The Division plans to buy in small tablet computers from overseas manufacturers and customize them by adding software and electrical cables which will make the tablets suitable for retail sale in Ireland. The Division plans to commit to this type of business for the long term. Its strategy will involve regularly providing customers with a stream of new products (reflecting technological innovations in hardware and software capabilities) but the plan will also involve catering for the needs of customers seeking either budget-priced or high-spec tablets.

Advice the Division as to the potential role of the following pricing strategies in managing the profitability of this part of the business: (i) market skimming pricing; (ii)

premium pricing; and (iii) penetration pricing.(7 marks)[Total: 25 Marks]