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The total manufacturing life cycle costs of the monitor are estimated to be $12,600,000 and total life cycle costs overall of $23,000,000. The sales director believes that the maximum price of the new monitor would be $85 and the board wishes to make a 20% profit margin on it. The research and development and product design teams have estimated that they could undertake extra work, with the aim of finding ways to reduce total manufacturing costs by 25%. Total production is 300, 000 units.
Calculate the maximum level of costs that could be incurred by the research and development and product design teams if a 20% profit margin is to be achieved, assuming that the changes they suggest successfully reduce manufacturing costs by 25%.1. The answer is $550,000
2. How to obtain the answer?Expected sales: 85*300,000 = $25,500,000
Desired profit margin: 20%
Desired profit: $5,100,000
Therefore, desired cost: $20,400,000 (This is the amount that will give us 20% profit)Current estimated cost: $23,000,000
Manufacturing : $12,600,000
Therefore, other cost: 23 – 12.6 = $10,400,000If manufacturing costs reduced by 25%
Manufacturing cost: 12.6*0.75 = $9,450,000
Other cost: $10,400,000
Total: 10.4+9.45 = $19,850,000To keep the desired cost limited to 20,400,000, maximum R&D can spend is:
20.4 – 19.85 = $550,000
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