QUESTION FOUR

New Product Ltd $($NPL$)$ specializes in the designing and manufacturing of new products on the market. The company is now planning to introduce a new product specially designed for young children. Development of this product is scheduled to start soon. The company is therefore in the process of preparing a product lifecycle budget. The product is expected to have a lifecycle of three years and will be sold at K$150$ per unit.

The following are the estimated costs:

$,R$&$D$ and design costs $-$ K$1,350,000$ in year $1,K150,000$ in year $2$ and nil in year $3.$

Production costs $-$ Annual fixed cost of $K900,000$ over the product lifecycle plus a unit variable cost of K$24$ in year $1$ reducing to K$22\mathrm{.}50$ in years $2$ and $3.$

Marketing costs $-$ Annual fixed cost of $K600,000$ in year $1,$ reducing to $K450,000$ in years $2$ and $3$ plus a unit variable cost of K$5\mathrm{.}40$ in year $1$ reducing by $60$ Ngwee in each of the remaining two years.

Distribution costs $-$ Annual fixed cost of $K360,000$ and a unit variable cost of K$1\mathrm{.}50$ over the product lifecycle.

Customer service costs $-$ variable cost of $K3\mathrm{.}00$ per unit in year $1$ reducing to $K2\mathrm{.}25$ in years $2$ and $3.$

Production and sales units will be $7,500$ in year $1,30,000$ in year $2$ and $22,500$ in year $3.$

The sales price is expected to be constant at K$150$ per unit through$-$out the product lifecycle.

Required:

$($a$)$ Calculate the product lifecycle cost per unit and comment on the K$150$ sales price per unit proposed by NPL management.

$(10$ marks$)$

$($b$)$ Explain the following:

$($i$)$ The changes in the modern business environment that have prompted the development of lifecycle costing.

$(5$ marks$)$

$($ii$)$ The benefits that NPL would obtain from a product lifecycle costing exercise.

$(6$ marks$)$

Management is considering revising the unit sales price from K$150$ to K$146$ in order to increase sales revenue. A market research has indicated that the reduction in the price will increase total sales volume by $10\%.$ All costs will remain unchanged.

Required:

$($c$)$ Calculate the price elasticity of demand for the product and advise management on whether or not to reduce the sales price per unit.

$(4$ marks$)$

$[$Total $25$ Marks$]$