A3

Get through intro

So far, we have come across accounting systems which report costs and revenue by splitting them into time
periods such as a month, a year, etc. This prevents consideration of the total profitability of an individual
product or any other cost object and therefore does not allow the full picture to be seen.

‘Life-cycle costing’, on the contrary, traces all costs and revenue of a cost object (i.e., a product or service) from
the stage of product planning to after sales service and ultimate abandonment and disposal (i.e., the period
from ‘Cradle to Grave’).

This Study Guide will help learners to understand the cost consequences of developing and manufacturing a
product and to identify areas in which cost reduction efforts are likely to be most effective during the entire
product life-cycle.

You need to understand the concept of ‘life-cycle costing’ so that, as management accountants, you can find
out and inform management whether the profits earned by a product during the manufacturing stage will be
able to cover the costs incurred during the pre-manufacturing (development, design, etc.) and post-
manufacturing stage (after sales service, product support, etc.) or not.

a) Identify the costs involved at different stages of the life-cycle

b) Explain the implications of life-cycle costing on pricing, performance management and decision-
making
A3.2: Specific Cost And Management Accounting Techniques ©GTG

Introduction

Let us look at an example to understand the concept of life-cycle costing. ‘Easy -accounting’ is an accounting
software package which has a six year product life-cycle. The following are the year-wise costs estimated
during its life-cycle:

Cost Items Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

$ $ $ $ $ $
Research & Development costs 280,000
Design costs 125,000
Production costs 115,000 202,000 85,000
Marketing costs 150,000 210,000 135,000 50,000
Distribution costs 12,000 20,000 8,500 5,000
Customer-service costs 5,000 20,000 45,000 55,000

The life-cycle costs for the ‘Easy-accounting’ package are as follows:

Life-cycle costs $

Research & Development costs 280,000

Design costs 125,000

Production costs 402,000

Marketing costs 545,000

Distribution costs 45,500

Customer-service costs 125,000

Total Life-cycle costs 1,522,500

It clearly takes into consideration the costs of the package incurred during the entire life-cycle. Accordingly, from
life-cycle costing, the management can know whether the revenue earned by the product is sufficient to cover
the whole costs incurred during its life-cycle.

When viewed as a whole, there are opportunities for cost reduction and minimisation (and thereby scope for
profit maximisation) whereas these are unlikely to be found when management focuses on maximising profit
on a period–by-period basis.

In this Study Guide, we will find out about the costs involved at different stages of the life-cycle and the
implications of life-cycle costing on pricing, performance management and decision-making.

1. Identify the costs involved at different stages of the life-cycle

[Learning outcome a]

The term ‘life-cycle costing’ encompasses both the concepts of ‘product life-cycle cost’ and ‘customer life-
cycle cost’.

1.1 Conceptualising ‘product life-cycle’

The term ‘product life-cycle’ refers to the succession of stages a product goes through. It is claimed that every
product has a life-cycle. It is launched; it grows and may, at some point of time, die. The progression of a
product through these stages is however, not certain. Some products seem to stay in one stage forever (e.g.
milk).
© GTG Life-Cycle Costing: A3.3

A product life-cycle may be classified into three broad stages. Each of the stages include at least one of the
business functions namely, Research and Development, Design, Production, Marketing, Distribution and
Customer service. The stages of a life-cycle are:

1. The planning and design stage. This stage includes the following business functions:

a) Research and Development

b) Design

2. The manufacturing and sales stage. This stage includes the following business functions:

a) Production
b) Marketing
c) Distribution

3. The service and abandonment stage. This stage includes the following business functions:

a) After sales service

b) Disposal of production facility

Diagram 1: Identify the business functions involved at different stages of a product life-cycle

1.2 Costs committed and costs incurred

1. The costs that have not yet been incurred but will be incurred in the future on the basis of decisions that
have already been taken are termed committed costs.

Studies show that about 80% of the life-cycle costs of a product are committed at its planning and design
stage. It is difficult to significantly alter costs after they have been committed.

Example

The planning and design stage of a product determines its material and labour inputs and the production
process. At this stage, costs become committed and broadly determine the future costs that will be incurred
during the manufacturing stage.

2. Costs are incurred when a resource is used or sacrificed. The actual cost of a product is built up mostly in
the manufacturing stage and in the service and abandonment stage. Costs incurred vis-à-vis the costs
committed at different stages of the product life-cycle are compared in the following diagram:
A3.4: Specific Cost And Management Accounting Techniques ©GTG

Diagram 2: Comparison of costs committed and cost incurred in product life-cycle stages

Stages of product life-cycle

1.3 Costs involved at different stages of product life-cycle

For each of the business functions at each stage of life-cycle of each product, costs keep on being incurred.
Let us try to identify the possible costs at each stage of the life-cycle:

1. At the planning and design stage: Research and Development cost, Costs of product design, etc.

2. At the manufacturing stage: This stage witnesses both growth and maturity in sales. All the manufacturing,
marketing, selling and distribution costs are incurred at this stage.

3. At the service and abandonment stage: This last stage of the product life-cycle is signified by a decline in
sales volume. The demand for the product declines at this stage. The producers may be required to provide
after sales service for the already sold products. Costs that are incurred in this stage include all costs
relating to after sales service including provision of spares and expert services and costs of abandonment
and disposal of the product.

Life-cycle costing refers to the system that tracks and accumulates every individual cost which is
incurred during the whole life cycle of a product starting from its initial planning stage to the post
sales service and abandonment stage.

Diagram 3: Time frame of a typical Product Life-Cycle Cost

© GTG Life-Cycle Costing: A3.5

1.4 Conceptualising customer life-cycle costing

A different notion of life-cycle costs is customer life-cycle costs. Customer life-cycle costs include the total costs
incurred by a customer to acquire and use a product or service until it is replaced. Customer life-cycle costs for
a car, for example, include the cost of car itself plus the costs of operating and maintaining the car less the
disposal price of the car. Customer life-cycle costs can be an important consideration in the pricing decision.

The best way to understand customer life-cycle costing is to look at an example.

Example

Suppose you are shopping for a new water heater. One costs $50 more than the other, but is better insulated
and has a lower operating cost. Let’s assume they can both last ten years. It is observed that if one costs $25
more per year to operate, that difference amounts to $250 over the ten years. If we discount those savings
back to today and also consider the current inflation rate, it is worth about $200 today. Since that is much more
than the purchase cost difference, an initial investment of $50 is worth it from your point of view as a consumer.
On the other hand, the manufacturer of the better insulated variety of water heater may think of increasing its
product price considering its much advantageous customer life-cycle cost.

SYNOPSIS
Costs involved at different stages of life-cycle

2. Explain the implications of life-cycle costing on pricing, performance management and

decision-making
[Learning outcome b]

2.1 Implications of life-cycle costing on pricing

Most accounting systems report revenue, costs and profit on a periodic basis, and product profits are not
monitored over their life-cycle. A failure to trace all costs of products over their life-cycle hinders management’s
understanding of product profitability, because a product’s actual life-cycle profit is unknown.

Life-cycle costing estimates and accumulates costs over a product’s entire life-cycle so as to determine whether
the profits earned during the manufacturing phase will cover the costs incurred during the pre- and post-
manufacturing stages. To estimate the life-cycle costs it is essential to identify the costs incurred through
different stages of life-cycle of a product.

Only on knowing the life-cycle costs of a product, can one appropriately decide on its price.

Moreover, if viewed from the angle of customer life-cycle costs, the life-cycle costs provide input for pricing
across the lifecycle.

Example

An automobile manufacturer’s aim is to design cars that would minimise maintenance cost. The company
expects to charge a higher price and / or gain greater market share by selling these cars. Similarly,
manufacturers of washing machines and dishwashers charge higher prices for models that save electricity and
have low maintenance costs.

2.2 Implications of life-cycle costing on performance management

Life-cycle costing helps management to understand the cost consequences of developing and making a
product and to identify areas in which cost reduction efforts are likely to be most effective.
A3.6: Specific Cost And Management Accounting Techniques ©GTG

Since life-cycle analysis highlights the committed costs of a product, it is possible, through emphasis on product
planning, product design and development, to reduce product cost during its life-cycle. Life-cycle costing forms
an input to evaluation processes such as value management, economic appraisal and financial appraisal.

The old proverb, ‘time is money’, still holds true. The management of time is immensely important if the profit of
a product is to be maximised. The management of time is particularly emphasised in life-cycle costing. Since a
reduction in time during the development stage causes a decrease in cost or an increase in revenue, it in turn
causes an increase in profit.

2.3 Implications of life-cycle costing on decision-making

The importance of life-cycle costing lies in the consideration of the whole life-cycle.

Life-cycle costing provides a long-term picture of product profitability, feedback on the effectiveness of initial
planning and cost data to clarify the economic impact of alternatives chosen in the design, engineering phase
etc. It is also considered a way to enhance the control of manufacturing costs.

When viewed as a whole, cost reduction and minimisation opportunities as well as revenue extension
opportunities will present themselves. It provides premises for decision-making regarding product introduction,
product mix and regarding discontinuation of the products.

SYNOPSIS

Quick Quiz

1. What is meant by the term ‘product life-cycle costing’?

2. What is meant by the term ‘customer life-cycle costing’?

3. State the concept of the ‘committed cost’

4. Briefly state the stages of a ‘product life-cycle’

5. Briefly describe the implications of life-cycle costing on performance management

Answer to Quick Quiz

1. Product life-cycle costing estimates and accumulates costs over a product’s entire life-cycle (sometimes a
span of several calendar periods). It helps to identify whether the profits earned during the manufacturing
stage will cover the costs incurred during the pre- and post-manufacturing stages.

2. Customer life-cycle costing involves calculating the total costs incurred by a customer to acquire and use a
product or service until it is replaced. Customer life-cycle costs for a car, for example, include the cost of car
itself plus the costs of operating and maintaining the car minus the disposal price of the car.

3. The costs that have not yet been incurred but will be incurred in the future on the basis of decisions that
have already been taken are termed committed costs (e.g. depreciation of any non-current asset)
© GTG Life-Cycle Costing: A3.7

4. A product life-cycle may be classified into three broad stages. Each of the stages includes at least one of
the business functions namely, Research and Development, Design, Production, Marketing, Distribution and
Customer service. The stages of a life-cycle are:

(a) The planning and design stage. This stage includes the following business functions:

i. Research and Development

ii. Design

(b) The manufacturing and sales stage. This stage includes the following business functions:

i. Production
ii. Marketing
iii. Distribution

(c) The service and abandonment stage. This stage includes the following business functions:

i. After sales service

ii. Disposal of production facility

5. Life-cycle costing helps management to understand the cost consequences of developing and making a
product and to identify areas in which cost reduction efforts are likely to be most effective.

Since life-cycle analysis indicates the committed costs of a product, it is possible, through emphasis on
product planning, product design and development, to reduce product cost during its life-cycle. Life-cycle
costing forms an input to evaluation processes such as value management, economic appraisal and
financial appraisal.

Self Examination Questions

Question 1

Futuristic Software Inc, a computer software company is developing a new accounting package, “Future
Accounting”. The following are the budgeted amounts for Future Accounting Package over a six-year product
life-cycle.

Year 1 and 2 $
Research and Development costs 360,000
Design costs 240,000

One-Time Variable Cost

Year 3 to 6 Setup Costs per package

$ $
Production costs 150,000 37.50
Marketing costs 105,000 36
Distribution costs 75,000 24
Customer-service costs 120,000 45

To be profitable, Futuristic Software Inc must generate revenues to recover costs of all six-business functions
taken together and, in particular, its high non-production costs.

Futuristic Software Inc wants to decide between three alternative selling prices i.e., $350, $430 and $550, so as
to maximise life-cycle operating income. Sales volumes at these prices have been estimated at 7,500 units,
6,000 units and 3,750 units respectively. Identify which option maximises life-cycle operating income.
A3.8: Specific Cost And Management Accounting Techniques ©GTG

Question 2

Ace-soft Technologies Plc is examining the profitability and pricing policies of three of its recently developed
software packages:

Electrical Genius: package for electrical engineers

Mechanical Genius: package for mechanical engineers

Industrial Genius: package for industrial engineers

Summary details on each package over their two-year “cradle-to-grave” product lives are as follows:

Number of units sold

Package Selling
Price $
Year 1 Year 2

Electrical Genius 235 2,.150 8,100

Mechanical Genius 285 2,200 3,150

Industrial Genius 185 5,100 3,700

Assume that no inventory remains on hand at the end of year 2.

Ace-soft Technologies is deciding which product lines to emphasise. In the past two years, profitability has been
mediocre. Ace-soft Technologies is particularly concerned with the increase in R & D costs. An analyst pointed
out that for one of its most recent packages (Industrial Genius), major efforts had been made to reduce R &D
costs.

The engineering software manager decides to collect the following life-cycle revenue and cost information for
the Electrical Genius, Mechanical Genius and Industrial Genius packages:

Electrical Genius Mechanical Genius Industrial Genius

Year 1 Year 2 Year 1 Year 2 Year 1 Year 2

$ $ $ $ $ $
Revenues 505,250 1,903,500 627,000 897,750 943,500 684,500

Costs:

R & D cost 760,000 0 495,000 0 215,000 0

Design of product 215,000 25,000 115,000 7,750 83,500 12,000

Manufacturing 55,250 221,000 90,000 90,000 162,000 54,000

Marketing 155,000 395,000 132,000 153,000 224,000 198,000

Distribution 19,000 66,500 23,000 33,000 58,000 35,000

Customer service 45,000 270,000 33,000 99,000 202,000 322,000

Required:

(a) How does a product life-cycle income statement differ from a conventional income statement? What are
the benefits of using a product life-cycle reporting format?

(b) Present a product life-cycle income statement for each software package. Which package is the most
profitable, and which is the least profitable? Ignore the time value of money.

(c) How do the three software packages differ in their cost structure (the percentage of the totals costs in each
cost category)?

Question 3

Donald products make digital cameras. Donald is preparing a product life-cycle budget for a new digital
camera, DC3. Development on the new digital camera is to start shortly. Estimates for DC3 are as follows:
© GTG Life-Cycle Costing: A3.9

$
Life-cycle units manufactured and sold 800,000
Selling price per camera 80
Life-cycle costs:
R & D and design costs 2,000,000
Manufacturing:
Variable cost per camera 30
Variable cost per batch 1,200
No. of batches 1,000
Fixed costs 3,600,000
Marketing:
Variable cost per camera 6.40
Fixed costs 2,000,000
Distribution:
Variable cost per batch 560
No. of batches 320
Fixed costs 1,440,000
Customer-service costs per camera 3.00

Ignore the time value of money.

Required:

(a) Calculate the budgeted life-cycle operating income for the new digital camera.
(b) What percentage of the budgeted total product life-cycle costs will be incurred by the end of the R & D and
design stages?
(c) An analysis reveals that 80% of the budgeted total product life-cycle costs of the new digital camera will be
committed at the R & D and design stages. What are the implications for managing DC3’s costs?
(d) Donald’s Market Research Department estimates that reducing DC3’s price by $6 will increase life-cycle unit
sales by 10%. If unit sales increase by 10%, design plans to increase manufacturing and distribution batch
sizes by 10% as well. Assume that all variable costs per camera, variable cost per batch, and fixed costs will
remain the same. Should Donald reduce DC3’s price by $6? Show your calculations.

Answers to Self Examination Questions

Answer 1

Statement showing comparison of alternative life-cycle revenue, life-cycle costs and life-cycle operating
income

Alternative Selling Price/

Sales-Quantity Combination
A B C
Selling price per package $350 $430 $550
Sales quantity in units 7,500 6,000 3,750

A. Life-cycle revenues $2,625,000 $2,580,000 $2,062,500

B. Life-cycle costs :
R & D costs $360,000 $360,000 $360,000
Design cost of product/ process $240,000 $240,000 $240,000
Production costs (w1) $431,250 $375,000 $290,625
Marketing costs (w2) $375,000 $321,000 $240,000
Distribution costs (w3) $255,000 $219,000 $165,000
Customer-service costs (w4) $457,500 $390,000 $288,750

Total life-cycle costs $2,118,750 $1,905,000 $1,584,375

C. Life-cycle operating income (A - B) $506,250 $675,000 $478,125
A3.10: Specific Cost And Management Accounting Techniques ©GTG

Clearly, alternative B with a selling price per package of $430 and a sales volume of 6,000 units yields the
highest operating income.

Workings

1. Production costs-

For A, $150,000 + (7,500 units x $37.50/package) = $431,250

For B, $150,000 + (6,000 units x $37.50/package) = $375,000
For C, $150,000 + (3,750 units x $37.50/package) = $290,625

2. Marketing Costs-

For A, $105,000 + (7,500 units x $36/package) = $375,000

For B, $105,000 + (6,000 units x $36/package) = $321,000
For C, $105,000 + (3,750 units x $36/package) = $240,000

3. Distribution costs-

For A, $75,000 + (7,500 units x $24/package) = $255,000

For B, $75,000 + (6,000 units x $24/package) = $219,000
For C, $75,000 + (3,750 units x $24/package) = $165,000

4. Customer-service costs-

For A, $120,000 + (7,500 units x $45/package) = $457,500

For B, $120,000 + (6,000 units x $45/package) = $390,000
For C, $120,000 + (3,750 units x $45/package) = $288,750

Note
Life-cycle costs provide useful information for strategically evaluating pricing decisions.
While calculating life-cycle revenue and life-cycle costs, it may be noted that calculation of annual revenue
or annual cost is meaningless. Here, the revenue and the costs for the entire life-cycle of the product will
have to be considered. Again, in annual accounts, the non-production costs such as Research and
development cost and Design cost are normally considered as deferred cost and are amortized during the
useful life of the product. But, so as to know the life-cycle revenue and costs of the product, one needs to
consider revenue and costs for the whole life-cycle.

Answer 2

(a) Difference between a product life-cycle income statement and a conventional income statement

A product life-cycle income statement considers all revenue earned and all costs incurred during the life-
cycle of a product. The life-cycle of the product may span a number of years.

On the other hand, in a conventional accounting system, income statements are prepared periodically, i.e.
product costs and revenues are reported period-wise. This prevents consideration of the total profitability of
an individual product or any other cost object and does not allow the full picture to be seen.

Moreover, the life-cycle costs will include the research and development cost and the design cost. In
contrast, in a conventional accounting system, the non-production costs such as research and
development cost and design cost are normally considered to be deferred costs and are amortized during
the useful life of the product.

The benefits of using a product life-cycle reporting format:

Life-cycle costing provides a long-term picture of product profitability, feedback on effectiveness of initial
planning and cost data to clarify the economic impact of alternatives chosen in the design, engineering
phase etc.

It is also considered a way to enhance the control of manufacturing costs.

When viewed as a whole, cost reduction and minimisation opportunities as well as revenue extension
opportunities will present themselves. It provides premises for decision-making regarding product
introduction, product mix and regarding discontinuation of the products.
© GTG Life-Cycle Costing: A3.11

(b) Alhough not desired in the problem, a conventional income statement has been prepared so as to
show the difference between the conventional income statement and the product life-cycle income
statement

Step 1

Prepare the conventional income statement

Conventional Income Statement

Electrical Genius Mechanical Genius Industrial Genius

Year 1 Year 2 Year 1 Year 2 Year 1 Year 2
$ $ $ $ $ $
Revenues 505,250 1,903,500 627,000 897,750 943,500 684,500
Costs:
R & D cost 760,000 0 495,000 0 215,000 0
Design of product 215,000 25,000 115,000 7,750 83,500 12,000

Manufacturing 55,250 221,000 90,000 90,000 162,000 54,000

Marketing 155,000 395,000 132,000 153,000 224,000 198,000
Distribution 19,000 66,500 23,000 33,000 58,000 35,000
Customer
service 45,000 270,000 33,000 99,000 202,000 322,000
Total cost 1,249,250 977,500 888,000 382,750 944,500 621,000

Net operating (744,000) 926,000 (261,000) 515,000 (1,000) 63,500

income

Step 2

Prepare the product life-cycle income statement

Product Life-Cycle Income Statement

Mechanical Industrial
Electrical Genius Genius Genius
$ $ $
Revenues 2,408,750 1,524,750 1,628,000
Costs:
R & D cost 760,000 495,000 215,000
Design of product 240,000 122,750 95,500
Manufacturing 276,250 180,000 216,000
Marketing 550,000 285,000 422,000
Distribution 85,500 56,000 93,000
Customer service 315,000 132,000 524,000
Total cost 2,226,750 1,270,750 1,565,500

Net operating income 182,000 254,000 $62,500

(for the life-cycle)

From the life-cycle net operating income, it is apparent that ‘Mechanical genius’ is the most profitable
package. On the other hand, ‘Industrial Genius’ is the least profitable package.
A3.12: Specific Cost And Management Accounting Techniques ©GTG

Workings

Electrical Genius Total

Year 1 Year 2
$ $ $
A. Revenues 505,250 $1,903,500 $2,408,750
B. Costs:
R & D cost 760,000 0 760,000
Design of product 215,000 25,000 240,000
Manufacturing 55,250 221,000 276250
Marketing 155,000 395,000 550,000
Distribution 19,000 66,500 85,500
Customer service 45,000 270,000 315,000
Total cost 1,249,250 977,500 2,226,750
C. Net operating income
(A – B) (744,000) 926,000 182,000

Mechanical Genius Total

Year 1 Year 2
$ $ $
A. Revenues 627,000 897,750 1,524,750
B. Costs:
R & D cost 495,000 0 495,000
Design of product 115,000 7,750 122,750
Manufacturing 90,000 90,000 180,000
Marketing 132,000 153,000 285,000
Distribution 23,000 33,000 56,000
Customer service 33,000 99,000 132,000
Total cost 888,000 382,750 1,270,750

C. Net operating income

(A – B) (261,000) 515,000 254,000

Industrial Genius Total

Year 1 Year 2
$ $ $
A. Revenues 943,500 684,500 1,628,000
B. Costs:
R & D cost 215,000 0 215,000
Design of product 83,500 12,000 95,500
Manufacturing 162,000 54,000 216,000
Marketing 224,000 198,000 422,000
Distribution 58,000 35,000 93,000
Customer service 202,000 322,000 524,000
Total cost 944,500 621,000 1,565,500

C. Net operating income

(A – B) (1,000) 63,500 62,500
© GTG Life-Cycle Costing: A3.13

(c) The cost structures of different software packages are displayed below in percentage terms

Electrical
Genius Mechanical Genius Industrial Genius
Costs ($) % Costs ($) % Costs ($) %
Planning and design
costs
R & D cost 760,000 34.13 495,000 38.95 215,000 13.73
Design of product 240,000 10.78 122,750 9.66 95,500 6.10

Manufacturing and
sales cost
Manufacturing 276,250 12.41 180,000 14.16 216,000 13.80
Marketing 550,000 24.70 285,000 22.43 422,000 26.96
Distribution 85,500 3.84 56,000 4.41 93,000 5.94

Service and
abandonment cost
Customer service 315,000 14.15 132,000 10.39 524,000 33.47
Total 2,226,750 100 1,270,750 100 1565,500 100

Answer 3

(a) Product Life-cycle Income Statement

Particulars $
Life-cycle units manufactured and sold 800,000
Selling price per camera 80
A. Life-cycle revenue 64,000,000
B. Life-cycle costs:
R & D and design costs 2,000,000
Manufacturing (w1) 28,800,000
Marketing (w2) 7,120,000
Distribution (w3) 1,619,200
Customer-service costs (w4) 2,400,000
Total Life-cycle costs 41,939,200

C. Life-cycle operating income (A - B) 22,060,800

Workings

1. Total Manufacturing Cost:

Fixed cost = $3,600,000
Variable cost of camera = $24,000,000
(800,000 cameras x $30/camera)
Variable cost of batch = $1,200,000
(1000 batches x $1,200/batch)
Total = $28,800,000

2. Total Marketing Cost:

Fixed cost = $2,000,000
Variable cost of camera = $5,120,000
(800,000 cameras x $6.40/camera)
Total = $7,120,000
A3.14: Specific Cost And Management Accounting Techniques ©GTG

3. Total Distribution Cost:

Fixed cost = $1,440,000
Variable cost of batch = $179,200
(320 batches x $560/batch)
Total = $1,619,200

4. Total Customer-service Cost:

(800,000 cameras x $3.00/camera) = $2,400,000

(b) The percentage of the budgeted total product life-cycle costs that will be incurred by the end of the R & D
and design stage is

= (R & D and design cost/Total product life-cycle costs) x 100

= (2,000,000/41,939,200) x 100
= 4.77%.

Note

Although the costs committed at the Research and Development and design stage are normally 80%
(approximately) of the budgeted total product cost, the actual costs incurred are only 4.77%.

(c) It had been revealed that the committed costs at the R & D and design stage for the product DC3 were 80%
of the total budgeted costs. This implies that the R & D and design stage itself determines what the
manufacturing cost of the product will be. If an appropriate product design is made by employing the
techniques of value engineering, the actual costs in the subsequent stages of the product life-cycle can be
greatly reduced. To manage DC3’s costs, it is necessary in the design stage to identify the product features
which are non-value added and accordingly to curtail these features.

(d) If the price of DC3 is reduced by £6,

The proposed selling of the product will be $ (80 – 6) = $74

Accordingly, the quantity sold will increase by 10%, i.e., number of units to be sold during the life-cycle will
be 800,000 x 110% = 880,000 units.

Batch size would also increase to $1,100.