Global LLC specializes in the manufacture of a small range of hi-tech products for hospitals and health care sector. They are currently considering the development of a new type of Blood pressure monitor, which would be the first of its kind in the market. It would take one year to develop, with sales then commencing at the beginning of the second year. The product is expected to have a life cycle of two years, before it is replaced with a technologically superior product. The following cost estimates have been made.
Year 1 Year 2 Year 3
Units manufactured and sold 100,000 200,000
Research and development costs RO 160,000
Product design costs RO 800,000
Marketing costs RO 1,200,000 RO 1,000,000 RO 1,750,000
Manufacturing costs:
Variable cost per unit RO 40 RO 42
Fixed production costs RO 650,000 RO 1,290,000
Distribution costs:
Variable cost per unit RO 4 RO 4·50
Fixed distribution costs RO 120,000 RO 120,000
Selling costs:
Variable cost per unit RO 3 RO 3·20
Fixed selling costs RO 180,000 RO 180,000
Administration costs RO 200,000 RO 900,000 RO 1,500,000
Required:
(a) Calculate the life cycle cost per unit. (6 marks)
(b) Discuss the benefits of life cycle costing. (4 marks)
(c) Explain the main steps involved in developing a target price and target cost for a product in a typical manufacturing company. (5 marks)
