Problem
The price for internet phones declines about 50% per year. An internet phone company is working on a next-generation phone, and its product and process development is almost done. 15 days before development and production qualification will be completed, a development engineer realizes that a revision to the product design would enable an increase in the production rate by 20% but would require the development and qualification time before production can begin to be extended by 75 days (i.e., 90 days instead of 15 days). Assume mature yield will be realized as soon as production begins (i.e., RT = 0), product life will be 2 years after production begins, production cycle time will be constant over product life and will not be affected by the revision, and the company can sell immediately all phones it can make.
I. Assume the 50% per year rate of price decline is exact. If the revision is pursued, would lifetime product revenue go up or go down? By how much? Should the company extend development time and make the revision?
II. Now suppose the company is unsure how fast prices will decline. To the nearest integer percentage, determine the rate of price decline for which making the revision would be a break-even proposition.
III. Let's retain the assumption that the phone price declines about 50% per year. But now suppose that the revision would result in the manufacturing cycle time increasing by 25 days. In this case, if the revision is pursued, would lifetime product revenue go up or go down? By how much? Should the company extend development time and make the revision?