The marketing department of Bream Hot Water Ltd has recommended that the company introduce a new solar hot water system, to be called the Sunstruck. To compete effectively with existing models offered by other companies, the Sunstruck would need to be priced at $800. The company requires a target profit margin on sales 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 the Sunstruck's cost of manufacture per unit are:

Direct material

$250

Direct labour

125

Manufacturing overhead*

125

$500

The Marketing Department is keen to introduce the Sunstruck as soon as possible. However, the management accountant is concerned about the non-manufacturing costs likely to be associated with the new product. He asks the departments that are upstream and downstream of manufacturing to estimate the costs in their departments associated with the development, production and sale of the Sunstruck. He receives the following information:

Estimated costs associated with the proposed Sunstruck (in $'000s)

Department

Year

Year

Year

Year

Year

1

2

3

4

5

Research and

1 500

Development

Product and Process

3 000

700

Design

Marketing

1 000

800

500

400

Customer Support

250

800

750

200

Forecast sales:

Year 2

10 000 units

Year 3

15 000 units

Year 4

5 000 units

Required:

1)Calculate the target cost for the Sunstruck that will meet the target selling price of $800 and the target profit margin of 30 per cent on sales. Compare this with the estimated manufacturing cost. On this basis, would you recommend the development and introduction of the Sunstruck model?

2) Prepare a life cycle budget for the Sunstruck that covers each year from Year 1 to Year 5. Show the calculation of Sales Revenue and Cost Of goods Sold ?