A manufacturing business is planning a new product. Market research suggests that demand for the product would last for 5 years. At a selling price of £14.00 per unit they expect to sell 3,000 units in the first year and 13,750 units in each of the other four years. The company wishes to achieve a mark-up of 40% on cost. It is estimated that the lifetime costs of the product will be as follows:

Manufacturing costs – £8.00 per unit

Design and development costs – £80,500

End of life costs – £50,000

It has been further estimated that if the company were to spend an additional £20,300 on design, then the manufacturing costs per unit could be reduced.

Required:

  • What is the target cost per unit for the product?
  • What is the original lifecycle cost per unit and determine whether the product is worth making on that basis?
  • If the additional amount on design were to be spent, calculate the maximum manufacturing cost per unit that could be allowed if the company is to achieve the required mark-up

 

(b) Discuss how Kaizen costing might be used to support life-cycle costing.

Target Costing, life cycle cost, Kaizen costing