Life Cycle Costing
LIFE CYCLE COSTING
Question 1
Solaris specializes in the manufacture of solar panels. It is planning to introduce a new slim line solar panel specially designed for small houses. Development of the new panel is to begin shortly and Solaris is in the process of determining the price of the panel. It expects the new product to have the following costs. Particulars | Year 1 | Year 2 | Year 3 | Year 4 | Units manufactured and sold | 2,000 units | 15,000 units | 20,000 units | 5,000 units | R&D Costs | £1,900,000 | £100,000 | -- | -- | Marketing costs | £100,000 | £75,000 | £50,000 | £10,000 | Production cost per unit | £500 | £450 | £400 | £450 | Customer service cost per unit | £50 | £40 | £40 | £40 | Disposal of specialist equipment | -- | -- | -- | £300,000 |
The Marketing Director believes that customers will be prepared to pay £500 for a solar panel but the Financial Director believes this will not cover all of the cost throughout the lifecycle.
Required:
Calculate the cost per unit looking at the whole life cycle and comment on the suggested price.
Question 2
A company manufactures MP3 players. It is planning to introduce a new model and development with begin very soon. It expects the new products to have a life cycle of 3 years and the following costs have been estimated. Particulars | Year 0 | Year 1 | Year 2 | Year 3 | Units manufactured and sold | -- | 25,000 | 100,000 | 75,000 | Price per unit | -- | £90 | £80 | £70 | Research and Development 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 Cost | | £300,000 | £200,000 | £200,000 | Distribution Cost | | | | | Variable cost per unit | | £1 | £1 | £1 | Fixed Cost | | £190,000 | £190,000 | £190,000 | Customer service cost per unit | | £3 | £2 | £2 |
Question 1
Solaris specializes in the manufacture of solar panels. It is planning to introduce a new slim line solar panel specially designed for small houses. Development of the new panel is to begin shortly and Solaris is in the process of determining the price of the panel. It expects the new product to have the following costs. Particulars | Year 1 | Year 2 | Year 3 | Year 4 | Units manufactured and sold | 2,000 units | 15,000 units | 20,000 units | 5,000 units | R&D Costs | £1,900,000 | £100,000 | -- | -- | Marketing costs | £100,000 | £75,000 | £50,000 | £10,000 | Production cost per unit | £500 | £450 | £400 | £450 | Customer service cost per unit | £50 | £40 | £40 | £40 | Disposal of specialist equipment | -- | -- | -- | £300,000 |
The Marketing Director believes that customers will be prepared to pay £500 for a solar panel but the Financial Director believes this will not cover all of the cost throughout the lifecycle.
Required:
Calculate the cost per unit looking at the whole life cycle and comment on the suggested price.
Question 2
A company manufactures MP3 players. It is planning to introduce a new model and development with begin very soon. It expects the new products to have a life cycle of 3 years and the following costs have been estimated. Particulars | Year 0 | Year 1 | Year 2 | Year 3 | Units manufactured and sold | -- | 25,000 | 100,000 | 75,000 | Price per unit | -- | £90 | £80 | £70 | Research and Development 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 Cost | | £300,000 | £200,000 | £200,000 | Distribution Cost | | | | | Variable cost per unit | | £1 | £1 | £1 | Fixed Cost | | £190,000 | £190,000 | £190,000 | Customer service cost per unit | | £3 | £2 | £2 |