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John Moffat.
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deekshabee
- Topics: 24
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hi sir,
questiion:
Company B is about to start developing a new product for launch in its existing market.
They have forecast sales of 20,000 units and the marketing department suggest a selling
price of $43/unit. The company seeks to make a mark-up of 40% product cost. It is
estimated that the lifetime costs of the product will be as follows:
(1) Design and development costs $43,000.
(2) Manufacturing costs $15/unit.
(3) Plant decommissioning costs $30,000.
The company estimates that if it were to spend an additional $15,000 on design,
manufacturing cost/unit could be reduced.
What is the life cycle cost per unit of the new product?
A $18.65
B $22
C $22.87
D $24solution: The original life cycle cost per unit = ($43,000 + (20,000 × $15) + $30,000)/20,000 = $18.65
i want ask while answering this ques, why haven’t we considered the line that says “the company estimates that if it were to spend an additional $15,000 on design, manufacturing cost/unit could be reduced.”
John Moffat
- Topics: 57
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Because on what you have typed, we are not told by how much the manufacturing cost is reduced by and so we cannot possibly take into account the extra $15,000.
I am guessing that this is the first part of a section B question and that the information about the extra $15,000 is relevant for a later part of the question.
I work through a very similar question (with all the information) in my free lectures on life-cycle costing.
deekshabee
- Topics: 24
- Replies: 20
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No, there are no parts. This is a section A question.
Also, in the question that you explain in your lecture, we first calculate the target cost and then proceed further.
So, here in this question, is the information relating to the calculation of target cost not relevant?
I tried to solve this question as per the method followed by you.
what I did was to first calculate the target cost = 30.71
then, I calculated the life cycle cost without considering the additional $15000 amount on design = 18.65But since the life cycle cost is already less than the target cost, I guess we don’t need to take into account the additional $ 15000 for design.
Am I getting it right?
John Moffat
- Topics: 57
- Replies: 49611
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We cannot take account of the extra $15,000 unless we know what the reduction in the manufacturing cost will be.
deekshabee
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