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, the management accountant is concerned about the non-manufacturing costs associated with the new product. He asks the upstream and downstream manufacturing departments 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 1

Year 2

Year 3

Year 4

Year 5

Research and development

3,000

Product and process design

6,000

1,400

Marketing

2,000

1,600

1,000

800

Customer support

500

1,600

1,500

400

The forecast sales of Sunstruck are as follows:

Year 2

10,000 units

Year 3

15,000 units

Year 4

5,000 units

Required:

a) Calculate the target cost for Sunstruck that will meet the target selling price of $1,600 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? (6 Marks)

5

b) Prepare a life cycle budget for Sunstruck that covers year 1 to year 5 (6 Marks).

c) Explain five (5) the disadvantages of the life cycle of Sunstruck (5 Marks).

d) Explain five (5) advantages of the life cycle of Sunstruck (5 Marks).