Harry and Sally are starting a new business venture and are in the process of ev

Question

Harry and Sally are starting a new business venture and are in the process of evaluating their product lines. Information for one new product, hand-made lamps, is as follows Every six months a new lamp pattern wil be put into production. Each new pattern wl require $8,000 in setup costs The lamp product line incurred $40,000 in development costs and is expected to be produced over the next six years Direct costs of producing the lamps average S144 each. Each lamp requires 12 labor-hours and 2 machine-hours Indirect manufacturing costs are estimated at S168,000 per year Customer service expenses average $16 per lamp Current sales are expected to be 2,000 units of each lamp pattern. Each lamp sells for S300. Sales units equal production units each year. Required What are the estimated life-cycle revenues? a. b. What is the estimated life-cycle operating income for the first year?

Explanation / Answer

Revenue life cycle of a product is the total revenue that would be earned through the product, throughout its life tem.

Life cycle costing is defined as the total cost throughout its life including planning, design, acquisition & support costs & any other costs directly attributable to owning / using the asset.

Life cycle cost is = Capital + lifetime operating costs + lifetime maintenance costs + disposal costs – residual value if any.

1 Estimated product life cycle revenue: New lamp pattern life period 6 months current sales 2000 units per pattern Selling price per lamp $                    300 Life time of the product line 6 years No. of new patterns throughout the product line term                           12 (6 years * 2 patters in a year) Total lamp sales during life time (units)                  24,000    (12 patters *2000 lamps) Total Sales Revenue during life time $        7,200,000 (24000* $300) 2 Life cycle operating income for the first year: $ Annual Revenue            1,200,000 (2000 lamps per pattern * 2 patterns * $300) first year costs: a. Set up costs (2 patterns * $8000) 16000 b. Development cost 40000 c. Direct cost of production (@ $144 per lamp) 576000 (2000*2 patterns*144) d. Indirect manufacturing costs 168000 e. Customer service expense 64000 (2000*2 patterns*16) Total Operating expenses for first year 864000 Lifecycle operating income                336,000 (1200,000-864,000)

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