Life-cycle costing Top Notch Ltd (TNL) has been producing home furniture for over 40 years. Charles Strong, the owner, has decided he would like to manufacture an executive desk that contains space for not only a laptop dock but also an MP3 player dock. Based on his experience with furniture, he believes that the desk will be a popular item for four years, and will then be obsolete because technology will have changed again. TNL expects the design phase to be very short, maybe four months. There is no R&D cost because the idea came from Charles, without any real research. Also, fixed production costs will not be high because TNL has excess capacity in the factory. The TNL accountants have developed the following budget for the new executive desk: Fixed Variable Months 1–4 Design costs $700 000 __ Months 5–36 Production Marketing Distribution $9 000 3 000 2 000 $225 per desk __ $20 per desk Months 37–52 Production Marketing Distribution $9 000 1 000 1 000 $225 per desk __ $22 per desk The design cost is for a total period of four months. The fixed costs of production, marketing and distribution are the expected costs per month. Question: Ignore the time value of money. Assume that TNL expects to make and sell 16,000 units in the first 32 months (months 5–36) of production (500 units per month) and 4800 units (300 per month) in the last 16 months (months 37–52) of production. If TNL prices the desks at $500 each, how much profit will TNL make in total and on average per desk?
Life-cycle costing
Top Notch Ltd (TNL) has been producing home furniture for over 40 years. Charles Strong, the owner, has decided he would like to manufacture an executive desk that contains space for not only a laptop dock but also an MP3 player dock. Based on his experience with furniture, he believes that the desk will be a popular item for four years, and will then be obsolete because technology will have changed again.
TNL expects the design phase to be very short, maybe four months. There is no R&D cost because the idea came from Charles, without any real research. Also, fixed production costs will not be high because TNL has excess capacity in the factory. The TNL accountants have developed the following budget for the new executive desk:
|
|
|
Fixed |
Variable |
|
Months 1–4 |
Design costs |
$700 000 |
__ |
|
Months 5–36 |
Production Marketing Distribution |
$9 000 3 000 2 000 |
$225 per desk __ $20 per desk |
|
Months 37–52 |
Production Marketing Distribution |
$9 000 1 000 1 000 |
$225 per desk __ $22 per desk |
The design cost is for a total period of four months. The fixed costs of production, marketing and distribution are the expected costs per month.
Question:
Ignore the time value of money.
Assume that TNL expects to make and sell 16,000 units in the first 32 months (months 5–36) of production (500 units per month) and 4800 units (300 per month) in the last 16 months (months 37–52) of production. If TNL prices the desks at $500 each, how much profit will TNL make in total and on average per desk?
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