Grunge Limited is introducing a new product to the market which is expected to have a life cycle of 3 years. It has forecast sales in the first year to be 20,000 units which will rise to 25,000 in the second year and fall to 5,000 in the third year. The proposed selling price is £85 per unit with variable costs of £30 per unit. 

Other lifetime costs are:

Design cost £500,000

Further development expenditure £350,000

Production overheads £800,000

Non production overheads £400,000

A mark up of 35% is required on all new products to consider them viable.

Required:

Calculate the lifetime cost per unit and, through the use of target costing, identify any cost gap.

Advise whether the production should go ahead based on the current costs

Answer rating: 100% (QA)

Lets calculate the lifetime cost per unit Sales in the first year 20000 units Sales in the second ye... View the full answer