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Target and Life Cycle

The document discusses target and life cycle costing for a new product. It provides estimated design, manufacturing and end of life costs. Originally, the lifetime cost per unit was $17, above the target cost of $15, so the product was not profitable. However, spending an additional $15,000 on design could reduce manufacturing costs enough to make the product worthwhile, with a maximum manufacturing cost per unit of $6.50.

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Ashraf Valappil
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55 views2 pages

Target and Life Cycle

The document discusses target and life cycle costing for a new product. It provides estimated design, manufacturing and end of life costs. Originally, the lifetime cost per unit was $17, above the target cost of $15, so the product was not profitable. However, spending an additional $15,000 on design could reduce manufacturing costs enough to make the product worthwhile, with a maximum manufacturing cost per unit of $6.50.

Uploaded by

Ashraf Valappil
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Target and Life Cycle Costing

1. A company is planning a new product. Market research information suggests that the
product should sell 10,000 units at $21.00/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:
a.
b.
c.

Design and development costs $50,000


Manufacturing costs $10/unit
End of life costs $20,000

The company estimates that if it were to spend an additional 15,000 on design,


manufacturing costs/unit could be reduced.
Required
(a) What is the target cost of the product?
(b) What is the original lifecycle cost per unit and is the product worth making on that
basis?
(c) If the additional amount were spent on design, what is the maximum manufacturing
cost per unit that could be tolerated if the company is to earn its required mark-up?

Solution
The target cost of the product can be calculated as follows:
(a) Cost + Mark-up = Selling price
100%
40%
140%
$15
$6
$21
(b) The original life cycle cost per unit = ($50,000 + (10,000 x $10) + $20,000)/10,000 =
$17
This cost/unit is above the target cost per unit, so the product is not worth making.
(c) Maximum total cost per unit = $15. Some of this will be caused by the design and
end of life costs:
($50,000 + $15,000 + $20,000)/10,000 = $8.50
Therefore, the maximum manufacturing cost per unit would have to fall from $10 to
($15 $8.50) = $6.50.

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