Question 3

Sanxing Ltd designs, develops and sells various models of smartphones. Smartphones have short lifecycles averaging only about three years. As such, product performance at Sanxing is assessed based on the expected profits made in each of the three years of popularity. Sanxing considers a profit margin of 35%, as well as contribution margin of 75%, to be reasonable.

The large development department at Sanxing carries out all the design work. Subsequently, completed smartphones are passed to the sales and distribution department for marketing and distribution of products.

Recently, Sanxing is working on a new phone - Super Galaxy, to be sold at the price of $300 per phone. Analysis show that for a production volume of 100,000 units, total production cost is expected to be $13 million. However, at the production volume of 140,000 units, a total cost of $15 million is expected. If production volume exceeds 150,000 units, the fixed cost will increase by 30%.

Sanxings budgeted volumes for Super Galaxy are as follows: Year 1: 80,000 units Year 2:160,000 units Year 3:40,000 units

In addition, marketing costs for Super Galaxy is expected to be $6,000,000 in year 1 and $4,000,000 in year 2. Design and development costs amounting to $30 million have been incurred. These costs were incurred before year 1, and had been written off to the income statement when incurred.

(a) Explain why the principles of lifecycle costing are relevant to Sanxing.(4 marks) (b) Compute the budgeted profitability of Super Galaxy over the products lifecycle. Based on your computations, assess the viability of launching the smartphone.(19 marks) (c) Compute (i) the target variable cost per unit; (ii) target total cost per unit; and (iii) the cost gap per unit of Super Galaxy over the products lifecycle.(5 marks)