Life Cycle Cost for Starcom Wallet Phone

Instruction:

- read and review the attachment.

Problem:

1 - Determine the life cycle costs for each pricing decision.
2 - What price for the wallet phone's life cycle will produce the most profit for Starcom?

Starcom Communications Technologies, Inc., has introduced a new phone so small that it can be carried in a wallet. Starcom invested $400,000 in research and development for the technology and another $800,000 to design and test the prototype. It predicts a four year life cycle for this phone and has gathered this cost data for it:

Monthly Fixed Costs Variable Costs
Manufacturing costs $25,000 $20
Marketing costs 20,000 5
Customer service costs 3,000 8
Distribution costs 5,000 15
Sales predictions:
For price of $150 - average annual sales of 20,000 units.
For price of $180 - average annual sales of 15,000 units.
For price of $225 - average annual sales of 12,000 units.

If the price of a wallet phone is $225, Starcom must increase its research and development costs by $100,000 and the prototyping costs by $400,000 to improve the model for the higher price. Fixed customer service costs would also increase by $500 per month and variable distribution costs would increase by $5 per unit to improve the customer service and distribution at the $225 level. At the lowest price level of $150, fixed marketing costs would be reduced by $5,000 per month because the low price would be the principal selling feature.