Question

Sagat Co, a watch producer, released a new product for teenagers – LCD watch. The product is projected to have 2 years life cycle following a release of an upgraded version of LCD watch. Sagat Co plans to use life cycle costing for total production cost and profit calculation purposes.

Product development costs total $2MM and the company gave up the opportunity to earn $950,000 contribution from another product sale. Sagat Co owns a 5-year patent for the technology, but it must be renewed on an annual basis with associated renewal costs of $50,000. The costs of the patent were $200,000.

Below projections are related to the LCD watch production.

2020 2021

Sales volumes (units)

Selling price per unit Material cost per unit

Labour cost per unit

Fixed production overheads Selling and distribution costs Environmental costs

350,000 560,000

$$ 50 45 19 16 10 8 1.8 2.0 0.7 0.8 0.2 0.18

Sagat Co does not have a fixed marketing contract so there are some doubts associated with advertising campaign costs. Below probabilities and range of costs are retrieved from open market sources:

Year 1

Expected cost Probability

($m) ($m)

2,5 0,3 3,0 0,4 3,5 0,3

Required:

1,5 0,2 2,5 0,5 3,5 0,3

(i) Using life cycle costing method, calculate the total expected profit for 2020 and 2021 ;

(ii) Using the target costing methodology briefly describe practical ways to close the target cost gap ;

(iii) Explain how activity-based costing methodology may implemented to account for the environmental costs of the business .

please quick

Answer 1

Particulars	2020(Amt in Million)	2021(Amt in Million)
Sales	(0.35*50) =17.5	(0.56*45) =25.2
Mat Cost	(0.35*19) =6.65	(0.56*16) =8.96
Labour Cost	(0.35*10) =3.5	(0.56*8) =4.48
Contribution	7.35	11.76
Fixed production ohd	1.8	2
Selling & distribution cost	0.7	0.8
Environmental Cost	0.2	0.18
Advertisement cost	(2.5*0.3+3*0.4+3.5*0.3) =3	(1.5*0.2+2.5*0.5+3.5*0.3) =2.6
Patent Renewal Cost	0.05	0.05
Expected Profit	1.6	6.13

Development cost is a sunk cost hence irrelevant.

Part2

use Value Engineering

Value Engineering means searching for opportunities to modify design of each component of a product to reduce cost without reducing the functionality or quality of product.

In given case Sagat Co. can use Value Engineering to modify design of LCD watch without reducing its functionality or quality. In this way it can close Target cost gap.

Part 3

ABC allocates internal cost to cost centre & cost drivers on the basis of activities that give rise to bthe cost. It breaks down environmental Cost hidden in general overhead & allocates it to products or services. In this business can identify & control environmental Cost which can constitute a significant part of overall product cost.