The marketing department at Cleveland Furniture Mfg. has an idea for a new product that is expected to have a 6-year life cycle. After conducting market research, the company found that the product could sell for $800 per unit in the first 4 years of life and for $650 per unit for the last 2 years. Unit sales are expected to be as follows:
Year 1 ……………….4,000
Year 2 ……………….3,600
Year 3 ……………….4,700
Year 4 ……………….5,000
Year 5 ……………….1,500
Year 6 ……………….1,000
Per-unit variable selling costs are estimated at $140 throughout the product's life; total fixed selling and administrative costs over the 6 years are expected to be $3,700,000.
Cleveland Furniture Mfg. desires a profit margin of 15 percent of selling price per unit.
a. Compute the life cycle target cost to manufacture the product. (Round to the nearest cent.)
b. If the company expects the product to cost $430 to manufacture in the first year, what is the upper bound for manufacturing cost in the following five years? (Round to the nearest cent.)
c. Refer to the original information. Assume that Cleveland Furniture Mfg. engineers indicate that the expected manufacturing cost per unit is $340. What actions might the company take to reduce this cost?