8.4 Life Cycle Costing Flashcards
Describe the introduction phase of the product life cycle
The introduction phase is characterized by few competitors. Profits are usually low in the introduction phase because of slow sales growth. Also, costs are high for sales promotion and relatively high for unit costs of production.
During the growth stage of a product’s life cycle,
A. The quality of products is poor.
B. New product models and features are introduced.
C. There is little difference between competing products.
D. The quality of the products becomes more variable and products are less differentiated.
B. New product models and features are introduced.
In the growth stage, sales and profits increase rapidly, cost per customer decreases, customers are early adopters, new competitors enter an expanding market, new product models and features are introduced, and promotion spending declines or remains stable.
Dixon Porter Co., which uses life cycle costing, is considering the manufacture of a product with a 5-year life cycle that will require spending $1,000,000 for R&D and $2,000,000 for design and testing. Annual fixed and unit variable costs for the product and projected average annual unit sales at three selling prices are given below:
Production Costs
- Fixed: $1,500,000
- Variable: $100
Marketing and distribution costs
- Fixed: $1,500,000
- Variable: $100
Customer service costs
- Fixed: $180,000
- Variable: $40
Unit average annual sales with sales price
- $750: 8,000
- $900: 6,000
- $1,125: 4,800
At the highest price, R&D costs will increase by $500,000 and design and testing costs by $1,000,000. Additionally, at the highest price, fixed customer service costs will rise by $30,000 per year, and variable customer service costs will rise by $25 per unit. At the lowest price, fixed marketing and distribution costs will decrease by $30,000 per year.
At a unit price of $900, Dixon Porter’s life cycle costs are
A. $18,900,000
B. $26,910,000
C. $28,350,000
D. $26,100,000
D. $26,100,000
The question states that “At the ‘highest price,’ R&D costs will increase by $500,000 and design and testing costs by $1,000,000. Additionally, at the highest price, fixed customer service costs will rise by $30,000 per year, and variable customer service costs will rise by $25 per unit.” Fixed customer service costs will rise by $30,000 per year, and variable customer service costs will rise by $25 per unit only at the ‘highest price.’ At a unit price of $900, upstream costs equal $3,000,000 ($1,000,000 + $2,000,000). Fixed costs of production and the fixed downstream costs equal $15,900,000 [($1,500,000 + $1,500,000 + $180,000) × 5 years], and variable costs of production and the variable downstream costs equal $7,200,000 [6,000 units × ($100 + $100 + $40) × 5 years]. Thus, the life cycle costs at a price of $900 equal $26,100,000 ($3,000,000 + $15,900,000 + $7,200,000).
The life-cycle costing method is
A. A method of costing that minimizes the selling expenses associated with a product.
B. The process for examining the various aspects of a product to identify cost efficiencies.
C. The process for managing all costs identified in the value chain.
D. A method of costing that focuses on the customer.
C. The process for managing all costs identified in the value chain.
The life-cycle costing approach to budgeting estimates a product’s revenues and expenses over its entire life cycle or value chain. Costs incurred before production, such as R&D costs, are referred to as upstream costs. Costs incurred after production, such as marketing and customer service, are referred to as downstream costs.
The number of competing firms is highest at which stage in the product life cycle?
A. Maturity.
B. Introduction.
C. Decline.
D. Growth.
A. Maturity.
The product life cycle has five stages: product development, introduction, growth, maturity, and decline. In the maturity stage, sales growth declines and competitors are most numerous.
