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28 January, 04:13

The Company is in the process of evaluating a new product using the following information: ∙ A new transformer has three production runs each year, each with $15,000 in setup costs. ∙ The new transformer incurred $45,000 in development costs and is expected to be produced over the next three years. ∙ Direct costs of producing the transformers are $55,000 per run of 5,000 transformers each. ∙ Indirect manufacturing costs charged to each run are $45,000. ∙ Destination charges for each transformer average $2.00. ∙ Customer service expenses average $0.40 per transformer. ∙ The transformers are selling for $20 the first year and will increase by $4 each year thereafter. ∙ Sales units equal production units each year. What is the estimated life-cycle operating income for the first year?

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  1. 28 January, 04:30
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    total loss for first year = ($96,000)

    Explanation:

    direct costs per 5,000 transformers = $55,000, or $11 per unit

    indirect manufacturing overhead per 5,000 transformers = $45,000 or $9 per unit

    destination charges per transformer = $2 each

    customer service expenses = $0.40 per transformer

    sales price:

    year 1 = $20 x 15,000 = $300,000

    year 2 = $24 x 15,000 = $360,000

    year 3 = $28 x 15,000 = $420,000

    total revenue = $1,080,000

    total costs:

    development costs = $45,000

    setup costs = $15,000 x 3 per year x 3 years = $135,000

    direct costs = $11 x 45,000 units = $495,000

    manufacturing overhead costs = $9 x 45,000 = $405,000

    sales and administrative costs = $2.40 x 45,000 = $108,000

    total = $1,188,000

    total operating life cycle loss = $1,080,000 - $1,188,000 = - $108,000

    life cycle operating loss for first year:

    total revenue = $300,000

    - setup costs = $45,000

    - direct costs = $165,000

    - manufacturing overhead costs = $135,000

    - S&A costs = $36,000

    - 1/3 of development costs = $15,000

    total loss = - $96,000
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