The marketing department of Hercules Ltd. is planning to introduce a new product

called H-5. The product details are as follows:

• Based on the market considerations, the target selling price per unit would be $800.
• The companys target profit margin on sales for all new products is 25% of sales.
• The initial estimate to manufacture one unit of H-5 includes: direct material $230; direct labour $125 and the manufacturing overhead to be applied at 80% of direct labour cost.

The estimated upstream and downstream costs and the estimated sales of the proposed model H-5 are as follows:

	Year 1	Year 2	Year 3	Year 4	Year 5
Research and Development	$3,960,000
Product and process design	$1,560,000	$792,000
Marketing		$888,000	$600,000	$504,000
Customer support		$360,000	$1,008,000	$720,000	$312,000
Expected sales (units)		16,560	9,120	4,320

Required:

a. Prepare a Year 1 to Year 5 Life Cycle Budget for the H-5 model and use this budget to estimate the average unit cost. On this basis, would you recommend the development and introduction of the H-5 model? Explain. (16 marks)