Centeral Equipment makes a variety of motor-driven products for homes and small businesses. The market research department recently identified power lawn mowers as a potentially lucrative market.
As a first entry into this market, Centeral is considering a riding lawn mower that is smaller and less expensive than those of most of the competition. Market research indicates that such a lawn mower would sell for about $980 at retail and $795 wholesale. At that price, Centeral expects life-cycle sales as follows:
Year ....... Sales
20X1 ...... 1,600
20X2 ...... 5,500
20X3 ....... 10,600
20X4 ....... 10,600
20X5 ...... 8,800
20X6 ...... 6,300
20X7 ...... 4,300

The production department has estimated that the variable cost of production will be $460 per lawn mower, and annual fixed costs will be $890,000 per year for each of the 7 years. Variable selling costs will be $40 per lawn mower and fixed selling costs will be $55,000 per year. In addition, the product development department estimates that $5.2 million of development costs will be necessary to design the lawn mower and the production process for it.
1. Compute the expected profit over the entire product life cycle of the proposed riding lawn mower.
2. Suppose Centeral expects pretax profits equal to 10% of sales on new products. Would the company undertake production and selling of the riding lawn mower?
3. Centeral Equipment uses a target costing approach to new products. What steps would management take to try to make a profitable product of the riding lawn mower?

  • CreatedNovember 19, 2014
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