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?

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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