Question: Destin Products makes digital watches. Destin is preparing a product life-cycle budget for a new watch, MX3. Development on the new watchis to start shortly. Estimates for MX3 are as follows:
| Life-cycle units manufactured and sold |
|
400,000 |
| Selling price per watch |
|
|
$40 |
| Life-cycle costs |
|
|
|
|
| R&D and design costs |
|
|
$1,000,000 |
| Manufacturing |
|
|
|
|
| Variable cost per watch |
|
|
$15 |
| Variable cost per batch |
|
|
$600 |
| Watches per batch |
|
|
$500 |
| Fixed costs |
|
|
|
$1,800,000 |
| Marketing |
|
|
|
|
| Variable cost per watch |
|
|
$3.20 |
| Fixed costs |
|
|
|
$1,000,000 |
| Distrubution |
|
|
|
|
| Variable cost per batch |
|
|
$289 |
| Watches per batch |
|
|
160 |
| Fixed costs |
|
|
|
$720,000 |
| Customer-service cost per watch |
|
$1.50 |
Ignore the time value of money
1. Calculate the budgeted life-cycle operating income for the new watch
2. What percentage of the budgeted total product life-cycle costs will be incurred by the end of the R&D and design stages?
3. An analysis reveals that 80% of the budgeted total product life-cycle costs of the new watch will be locked in at the R&D and design stage. What are the implicatons for manageing MX3's costs?
4. Destin's market Research Department estimates that reducing MX3's price by $3 will increasew life-cycle unit sales by 10%. If unit sales increase by 10%, Destin plans to increase manufacturing and distribution batc sizes by 10% as well. Assume that all variable costs per watch, variable costs per batch, and fixed costs will remain the swame. Should Destin reduce MX3's price by $3? Show your calculations.