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# Life Cycle Cost for Starcom Wallet Phone

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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.