Question

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.

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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