NewMaid has designed a new consumer product, a floor cleaner and wax, that is expected to have a 5-year life cycle. Based on its market research, NewMaid’s management has deter-mined that the new product should be packaged in 32-ounce containers, with a selling price of $6 in the first three years and $4 during the last two years. Unit sales are expected to be as follows:
Variable selling costs are expected to be $1 per container throughout the product’s life. Annual fixed selling and administrative costs are estimated to be $500,000. NewMaid management desires a 25 percent profit margin on selling price.
a. Compute the life cycle target cost to manufacture the product. (Round to the nearest cent.)
b. If NewMaid anticipates the new product will cost $3 per unit to manufacture in the first year, what is the maximum that manufacturing cost can be in the following 4 years? (Round to the nearest cent.)
c. Suppose that NewMaid engineers determine that expected manufacturing cost per unit over the product life cycle is $2.25. What actions might the company take to reduce this cost?