Question 3. Managing cost and quality (22 marks) The marketing department of Bream Hot Water Ltd has recommended that the company introduce a new solar hot water system called the Sunstruck. To compete effectively with existing models offered by other companies, Sunstruck would need to be priced at $1,600. The company requires a target profit margin for all new products of at least 30 per cent of sales. The technology in solar energy is developing rapidly, and therefore the Sunstruck is expected to be obsolete within three years of entering the market. Initial estimates of Sunstruck's cost of manufacture per unit are: Direct Material $500 Direct labour $250 Manufacturing overhead* $250 $1,000 *Manufacturing overhead is applied at 100 per cent of direct labour cost. The marketing department is keen to introduce Sunstruck as soon as possible. However, th management accountant is concerned about the non-manufacturing costs associated with t new product. He asks the upstream and downstream manufacturing departments to estima the costs in their departments associated with the development, production, and sale of th Sunstruck. He receives the following information: Estimated costs associated with the proposed Sunstruck (in $'000s) Department Year 1 Year 2 Year 3 Year 4 Year Research and development 3.000 Question 3. Managing cost and quality (22 marks) The marketing department of Bream Hot Water Ltd has recommended that the company introduce a new solar hot water system called the Sunstruck. To compete effectively with existing models offered by other companies, Sunstruck would need to be priced at $1,600. The company requires a target profit margin for all new products of at least 30 per cent of sales. The technology in solar energy is developing rapidly, and therefore the Sunstruck is expected to be obsolete within three years of entering the market. Initial estimates of Sunstruck's cost of manufacture per unit are: Direct Material $500 Direct labour $250 Manufacturing overhead* $250 $1,000 *Manufacturing overhead is applied at 100 per cent of direct labour cost. The marketing department is keen to introduce Sunstruck as soon as possible. However, th management accountant is concerned about the non-manufacturing costs associated with t new product. He asks the upstream and downstream manufacturing departments to estima the costs in their departments associated with the development, production, and sale of th Sunstruck. He receives the following information: Estimated costs associated with the proposed Sunstruck (in $'000s) Department Year 1 Year 2 Year 3 Year 4 Year Research and development 3.000