Cam Co manufactures webcams, devices which can provide live video and audio streams via personal computers. It has recently been suffering from liquidity problems and hopes that these will be eased by the launch of its new webcam, which has revolutionary audio sound and visual quality.
The webcam is expected to have a product life cycle of two years. Market research has already been carried out to establish a target selling price and projected lifetime sales volumes for the product. Cost estimates have also been prepared, based on the current proposed product specification. Cam Co uses life cycle costing to work out the target costs for its products, believing it to be more accurate to use an average cost across the whole lifetime of a product, rather than potentially different costs for different years. You are provided with the following relevant information for the webcam:Projected lifetime sales volume 50,000 unitsTarget selling price per unit $ 200Target profit margin (35% selling price) $70Target cost per unit $130Estimated lifetime cost per unit (see note below for detailed breakdown $160 $Manufacturing costs Direct material (bought in parts) 40 Direct labour 26 Machine costs 21 Quality control costs 10 Rework costs 3 100non-manufacturing costs Product develop costs 25 Marketing costs 35 60Estimated lifetime cost per unit 160 The average market price for a webcam is currently $150.The company needs to close the cost gap of $30 between the target cost and the estimated lifetime cost. The following information has been identified as relevant:1.
Direct material cost: all of the parts currently proposed for the webcam are bespoke parts. However, most of these can actually be replaced with standard parts costing 55% less. However, three of the bespoke parts, which currently account for 20% of the estimated direct material cost, cannot be replaced, although an alternative supplier charging 10% less has been sourced for these parts.