Rapid changes in technology and customer preferences.
Rapid changes in technology and customer preferences have shortened the product
life cycle with a propensity of reducing profit margins for most products. SJG Inc. is
planning to develop a new electric water pump with a two- year warranty.
• Cost of product development: £ 200,000.
• Cost of warranty repairs: £ 9 per repair, in 6 percent of the units, one year after
sales (during and after the product life).
• Fixed costs per annum are £ 110,000.
• Cost of end of product-life responsibilities due to disposal requirements: £ 3 per
unit, two years after sale.
• Selling price: £ 40 per unit in year 1 and reduction of £5 each year thereafter.
• Variable cost: £ 20 per unit in year 1 and reduction of £2 each year due to learning
curve experience effects.
• The projected sales volumes over a 3-year period are as follows: 12,000 units in
the first year, and 24,000 and 6,000 units respectively for the following 2 years.
Required: Prepare a product life cycle budget and advise the management whether SJG
Inc.’s product should be discontinued after two years or not. Provide a reasoned
basis for your advice.
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