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Calculate life-cycle operating income for Destin Products

Destin Products makes digital watches. Destin is preparing product life-cycle budget for a new watch, MX3. Development on the new watch is to start shortly. Estimates for MX3 are as follows:

Life-cycle units manufactured and sold 400,000
Selling price per watch $40
Life-cycle costs
R&D and design costs $1,000,000
Manufacturing
Variable cost per watch $15
Variable cost per batch $600
Watches per batch $500
Fixed costs $1,800,000
Marketing
Variable cost per watch $3.20
Fixed costs $1,000,000
Distribution
Variable cost per batch $289
Watches per batch 160
Fixed costs $720,000
Customer-service cost per watch $1.50

Ignore the time value of money

1. Calculate the budgeted life-cycle operating income for the new watch
2. What percentage of the budgeted total product life-cycle costs will be incurred by the end of the R&D and design stages?
3. An analysis reveals that 80% of the budgeted total product life-cycle costs of the new watch will be locked in at the R&D and design stage. What are the implications for managing MX3's costs?
4. Destin's market Research Department estimates that reducing MX3's price by $3 will increase life-cycle unit sales by 10%. If unit sales increase by 10%, Destin plans to increase manufacturing and distribution batch sizes by 10% as well. Assume that all variable costs per watch, variable costs per batch, and fixed costs will remain the same. Should Destin reduce MX3's price by $3? Show your calculations.

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Solution Summary

This solution is comprised of a detailed calculation for the budgeted life-cycle operating income of Destin Products' new watch.

$2.19