Reference no: EM132759423

Clara Ltd., which is a manufacturing company, has been financially successful for many years. The company's products tend to have short product lifecycles because of frequent technological change, and Clara Ltd.'s success is attributable to an ongoing program of research and development (R & D) which enables the company to introduce new products to market on a regular basis. Clara Ltd. uses target costing and lifecycle costing in managing its product portfolio, and the company considers a proposed new product to be commercially viable only if the product offers a markup of at least 35% on cost.

• Clara Ltd. is carrying out R & D work on a proposed new product (code-named the "PNP7") at present. The company expects this R & D work to cost a total of €27,000 by the time it is completed. The marketing manager of Clara estimates that (if and when the PNP7 is brought to market) the company would be able to achieve total sales of 5,000 units of the product over its product lifecycle at a selling price of €18.90 each. The company's production manager estimates that the production cost would be €9 per unit, and the company's engineering manager estimates that the task of dismantling and recycling the production equipment at the end of the product lifecycle would cost Clara Ltd. €16,000.

Problem (a) On the basis of the data presented above, calculate the lifecycle cost (per unit) of the PNP7 and the amount of any target cost gap. Also, identify and explain the uses which Clara Ltd. should make of this information.

Problem (b) Assume now that the company is considering a different approach to R & D which would be both more thorough and expensive than the one referred to above. It is believed that this would lead to the product being manufactured using a higher proportion of recyclable raw materials and production equipment than was previously envisaged. The cost consequences would include (i) a 20% decrease in the manufacturing cost per unit and (ii) a 75% decrease in the cost of dismantling and recycling the production equipment at the end of the product lifecycle.

Prepare calculations to show the maximum amount which Clara Ltd. could afford to spend on the different approach to R & D, if the company is to close the target cost gap. In answering this part, assume that the sales volume and price would not be affected.

Problem (c) Suggest ONE other significant way in which the company could seek to benefit commercially from the change to the product design which is referred to in part (b). Explain and justify your answer fully.