Chapter 3: Life-cycle costing

A company is planning a new product. Market research suggests that demand for the product would last for 5 years. At a selling price of $10.50 per unit they expect to sell 2,000 units in the first year and 12,000 units in each of the other four years.

The company wishes to achieve a mark up of 50% on cost. It is estimated that the lifetime costs of the product will be as follows: manufacturing costs $6.00 per unit; design and development costs $60,000; end of life costs $30,000.

Calculate (a) the target cost for the product; (b) the lifecycle cost per unit and determine whether or not the product is worth making.

It has been further estimated that if the company were to spend an additional $20,000 on design, then the manufacturing costs per unit could be reduced. (c) If the additional amount on design were to be spent, calculate the maximum manufacturing cost per unit that could be allowed if the company is to achieve the required mark-up.