Problem 1. Ortiz Manufacturing is considering developing and marketing one of tw
ID: 2602667 • Letter: P
Question
Problem 1. Ortiz Manufacturing is considering developing and marketing one of two new products, A and B. It has accumulated the following information about the two products:
PRODUCT A
PRODUCT B
RESEARCH AND DEVELOPMENT COST INCURRED TO DATE
800,000
350,000
ADDITIONAL DEVELOPMENT COSTS TO BRING PRODUCT TO MARKET
120,000
45,000
EXPECTED ANNUAL SALES
100,000 UNITS; 900,00
50,000 UNITS; 270,000
EXPECTED ANNUAL BATCH-LEVEL
130,000
60,000
ALLOCATED FACILITY-LEVEL COSTS
210,000
63,000
EXPECTED LIFE CYCLE
15 YEARS
8 YEARS
Required:
1) Which of these items are relevant to Ortiz's decision about which of these products it will launch?
PRODUCT A
PRODUCT B
RESEARCH AND DEVELOPMENT COST INCURRED TO DATE
800,000
350,000
ADDITIONAL DEVELOPMENT COSTS TO BRING PRODUCT TO MARKET
120,000
45,000
EXPECTED ANNUAL SALES
100,000 UNITS; 900,00
50,000 UNITS; 270,000
EXPECTED ANNUAL BATCH-LEVEL
130,000
60,000
ALLOCATED FACILITY-LEVEL COSTS
210,000
63,000
EXPECTED LIFE CYCLE
15 YEARS
8 YEARS
Explanation / Answer
Solution:-
The items that are relevant to Ortiz manufacturing’s decisions are; additional development costs, unit-level costs, batch-level costs and product live cycle. The two items that are irrelevant to the decision are the facility-level costs R&D costs. The reason that the research and development costs are irrelevant is because they are sunk costs. In addition, the facility-level costs are unavoidable; therefore, they are irrelevant.
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