A company manufactures MP3 players. It is planning to introduce a new model and development will begin very soon. It expects the new product to have a life cycle of 3 years and the following costs have been estimated.
|
Units manufactured and sold
|
Year 0
|
Year 1
25,000
|
Year 2
100,000
|
Year 3
75,000
|
|
Price per unit
|
|
$90
|
$80
|
$70
|
|
R&D costs
|
$850,000
|
$90,000
|
-
|
-
|
|
Production costs
Variable cost per unit
|
|
$30
|
$25
|
$25
|
|
Fixed costs
|
|
$500,000
|
$500,000
|
$500,000
|
|
Marketing costs
Variable cost per unit
|
|
$5
|
$4
|
$3
|
|
Fixed costs
|
|
$300,000
|
$200,000
|
$200,000
|
|
Distribution costs
Variable cost per unit
|
|
$1
|
$1
|
$1
|
|
Fixed costs
|
|
$190,000
|
$190,000
|
$190,000
|
|
Customer service costs per unit
|
|
$3
|
$2
|
$2
|
Required
a) Explain life cycle costing and state what distinguishes it from more traditional management accounting techniques.
b) Calculate the cost per unit looking at the whole lifecycle and comment on the price to be charged.