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Life-cycle costing

Fearless Furniture Manufacturing (FFM) has been manufacturing furniture for the home for over 30 years. George Fearless, 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 the desk will be a popular item for 4 years, and then will be obsolete because technology will have changed again.

FFM expects the design phase to be very short; maybe four months. There is no R&D cost because the idea came from George, without any real research. Also, fised production costs will not be high because FFM has excess capacity in the factory. The FFM accountants have developed the following budget for the bew executive desk:

Fixed Variable
(Months 1-4)
Design Costs $700,000 ---
(Months 5-36)
Production $9,000 $225 / desk
Marketing $3,000 ---
Distribution $2,000 $20 / desk
(Months 37-52 )
Production $9,000 $225/ desk
Marketing $1,000 ---
Distribution $1,000 $22 / desk

The design cost is for the total period of 4 months. The fixed costs of production, marketing, and distribution are the expected costs PER month. Ignore time value of money.

1. Assume FFM expects to make and sell 16,000 units in the first 32 months (Months 5-36) of production (500 units per month) and 4,800 units (300 per month) in the last 16 months (Months 37-52) of production. If FFM prices the desks at $500 each, how much profit will FFM make in total and on average per desk?
2. Suppose FFM is wrong about the demand for these executive desks, and after the first 36 months it stops making them altogether. It sells 16,000 desks for $400 each with the costs described for months 5-36, and then incurs no additional costs nor generates additional revenues. Will this have been a profitable venture for FFM?
3. Will your answer to #2 change if FFM still must incur the estimated fixed production costs for the whole period through month 52, even if FFM stops making executive desks at the end of 36 months?

* Complete in Excel

Solution Preview

See the attached excel file. Thanks

Given
Fixed Variable
Design Cost (1-4 months) $700,000 0
Production Cost (5-36 months) $9,000 $225 per desk
Marketing Cost (5-36 months) $3,000 $- per desk
Distribution Cost (5-36 months) $2,000 $20 per desk
Production Cost (37-52 months) $9,000 $225 per desk
Marketing Cost (37-52 months) $1,000 $- per desk
Distribution Cost (37-52 months) $1,000 $22 per desk

The design cost is for the total period of 4 months.  The fixed costs of production, marketing, and distribution are the expected costs PER month.  Ignore time value of money. 

1. Assume FFM expects to make and sell 16,000 units in the first 32 months (Months 5-36) of production (500 units ...

Solution Summary

This posting shows how to use life cycle costing for decision making. Specifically pricing, profitability, etc.

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