NewMaid has designed a new consumer product, a floor cleaner and wax, that is expected to have a 5 year life cycle. Based on its market research, NewMaid’s management has deter mined that the new product should be packaged in 32 ounce containers, with a selling price of $6 in the first three years and $4 during the last two years. Unit sales are expected to be as follows:
|
Year 1 |
300,000 |
|
Year 2 |
400,000 |
|
Year 3 |
600,000 |
|
Year 4 |
400,000 |
|
Year 5 |
250,000 |
|
Total |
1,950,000 |
Variable selling costs are expected to be $1 per container throughout the product’s life. Annual fixed selling and administrative costs are estimated to be $500,000. NewMaid management desires a 25 percent profit margin on selling price.
Required:
a. Compute the life cycle target cost to manufacture the product. (Round to the nearest cent.)
b. If NewMaid anticipates the new product will cost $3 per unit to manufacture in the first year, what is the maximum that manufacturing cost can be in the following 4 years? (Round to the nearest cent.)
c. Suppose that NewMaid engineers determine that expected manufacturing cost per unit over the product life cycle is $2.25. What actions might the company take to reduce this cost?