Life Cycle Costing:
Starcom Communications Technologies, Inc., has introduced a new phone so small that it can be carried in a wallet. Starcom invested $400,000 in research and development for the technology and another $800,000 to design and test the prototype. It predicts a four year life cycle for this phone and has gathered this cost data for it:
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Monthly Fixed Costs
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Variable Costs
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Manufacturing costs
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$25,000
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$20
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Marketing costs
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20,000
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5
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Customer service costs
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3,000
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8
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Distribution costs
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5,000
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15
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Sales predictions:
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For price of $150 - average annual sales of 20,000 units.
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For price of $180 - average annual sales of 15,000 units.
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For price of $225 - average annual sales of 12,000 units.
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If the price of a wallet phone is $225, Starcom must increase its research and development costs by $100,000 and the prototyping costs by $400,000 to improve the model for the higher price. Fixed customer service costs would also increase by $500 per month and variable distribution costs would increase by $5 per unit to improve the customer service and distribution at the $225 level. At the lowest price level of $150, fixed marketing costs would be reduced by $5,000 per month because the low price would be the principal selling feature.