Question

The marketing department of Hercules Ltd. is planning to introduce a new product called H-5. The...

The marketing department of Hercules Ltd. is planning to introduce a new product

called H-5. The product details are as follows:

  • Based on the market considerations, the target selling price per unit would be $800.
  • The company’s target profit margin on sales for all new products is 25% of sales.
  • The initial estimate to manufacture one unit of H-5 includes: direct material $230; direct labour $125 and the manufacturing overhead to be applied at 80% of direct labour cost.

The estimated upstream and downstream costs and the estimated sales of the proposed model H-5 are as follows:

Year 1

Year 2

Year 3

Year 4

Year 5

Research and Development

$3,960,000

Product and process design

$1,560,000

$792,000

Marketing

$888,000

$600,000

$504,000

Customer support

$360,000

$1,008,000

$720,000

$312,000

Expected sales (units)

         16,560

           9,120

           4,320

Required:

a. Prepare a Year 1 to Year 5 Life Cycle Budget for the H-5 model and use this budget to estimate the average unit cost. On this basis, would you recommend the development and introduction of the H-5 model? Explain.

Homework Answers

Answer #1
Particulars $ $
Revenue ($800*30000Units) 24000000
Less: Direct Material($230*30000) 6900000
Direct Labour($125*30000) 3750000
Manufacturing Overhead($100*30000) 3000000
Research & Development 3960000
Product and process design 2352000
Marketing 1992000
Customer Support 2400000
Total Cost 24354000
Loss 354000

The average unit cost would be = 24354000/30000 = $811.8

No, I would not recommend the introduction and development of product H5 because the product is loss making.

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