Life cycle product costing. Gadzooks, Inc., develops and manufactures toys that it then sells through infomercials. Currently, the company is designing a toy robot that it intends to begin manufacturing and marketing next year. Because of the rapidly changing nature of the toy industry, Gadzooks management projects that the robot will be produced and sold for only three years. At the end of the product's life cycle, Gadzooks plans to sell the rights to the robot to an overseas company for $250,000. Cost information concerning the robot follows:

For simplicity, ignore the time value of money.Required1. Suppose the managers at Gadzooks price the robot at $50 per unit. How many units do they need to sell to break even?2. The managers at Gadzooks are thinking of two alternative pricing strategies.a. Sell the robot at $50 each from the outset. At this price they expect to sell 500,000 units over its life-cycle.b. Boost the selling price of the robot in year 2 when it first comes out to $70 per unit. At this price they expect to sell 100,000 units in year 2. In years 3 and 4 drop the price to $40 per unit. The managers expect to sell 300,000 units each year in years 3 and 4. Which pricing strategy would you recommend?Explain.

Transcribed Image Text:

Variable Cost Total Fixed Costs over Four Years $ 650,000 per Unit Design costs Production costs Marketing and distribution costs Year 1 Years 2-4 $20 per unit $5 per unit $3,560,000 $2,225,000