Stone and Bicker are starting a new business venture and are in the process of evaluating their
product lines. Information for one new product, hand-made lamps, is as follows:
o Every six months a new lamp pattern will be put into production. Each new pattern
will require $11,200 in setup costs.
o The lamp product line incurred $48,000 in development costs and is expected to be
produced over the next six years.
o Direct costs of producing the lamps average $144 each. Each lamp requires 12
labor-hours and 2 machine-hours.
o Indirect manufacturing costs are estimated at $160,000 per year.
o Customer service expenses average $16 per lamp.
o Current sales are expected to be 2,000 units of each lamp pattern. Each lamp sells for
$224.
o Sales units equal production units each year.
Required:
a.
b.
c.
d.
e.
f.
cost?
What are the estimated life-cycle revenues?
What is the estimated life-cycle operating income for the first year?
What is the estimated life-cycle operating income for the second year?
What are the estimated life-cycle cost?
What are the estimated life-cycle income?
How much is the selling price if the company desires a 25% mark-up on life cycle
ANSWER:
a. Estimated life-cycle revenues ($224 x 2 patterns per x 2,000 x 6yrs)
$5,376,000
b.Sales ($224 x 2 x 2,000)
$896,000
Cost:
Development cost
Setup costs (2 x 11,200)
Direct manufacturing costs (2 x 144 x 2,000)
Indirect manufacturing costs
Customer service costs (2 x $16 x 2,000)
$48,000
22,400
576,000
160,000
64,000
870,400
$25,600
Estimated life-cycle operating income for the first
year
c. Sales ($224 x 2 x 2,000)
$896,000
Cost:
Setup costs (2 x 11,200)
Direct manufacturing costs (2 x 144 x 2,000)
Indirect manufacturing costs
Customer service costs (2 x $16 x 2,000)
Estimated life-cycle operating income for the
second year
d. Estimated life-cycle cost
Estimated life-cycle cost, first year
Estimated life-cycle cost, second year
Estimated life-cycle cost, third year
Estimated life-cycle cost, fourth year
Estimated life-cycle cost, fifth year
Estimated life-cycle cost, sixth year
Total
e. Estimated life-cycle income
Estimated life-cycle operating income, first year
Estimated life-cycle operating income, second year
Estimated life-cycle operating income, third year
Estimated life-cycle operating income, fourth year
Estimated life-cycle operating income, fifth year
Estimated life-cycle operating income, sixth year
Total
22,400
576,000
160,000
64,000
822,400
$73,600
$870,400
822,400
822,400
822,400
822,400
822,400
$4,982,400
$25,600
73,600
73,600
73,600
73,600
73,600
$393,600
f. Estimated selling price to attain desired profit
($4,982,400 x (100% + 25%)) / 24,000 units
$259.50