Ellipsis Electronics produces speakers for home entertainment systems. Because of the rapid rate of technological innovation in this market, most of the company’s products have short life cycles. The marketing manager, Jean, Wills, believes that new product introductions are the key to success. However, the managing director, Joseph Iacopetta, is concerned that the frequent changes in product lines is eroding the company’s profitability. He believes that many of the new products have such short life cycles that they never fully recover their costs. He asks the management accountant, Stan Willox, to help him. Willox decides to review the profitability of the Easy Ear Speaker System. (EESS) which has just been phased out after only 3 years on the market. First, Willox prepares the following conventional analysis of the profitability of the EESS.
|
Year 1 $ |
Year 2 $ |
Year 3 $ |
|
|
Sales Revenue |
50,000 |
95,000 |
35,000 |
|
Less: Cost of Goods sold: |
|||
|
Direct materials |
10,000 |
19,000 |
7,000 |
|
Direct labour |
5,000 |
9,500 |
3,500 |
|
Applied manufacturing overhead |
7,500 |
14,250 |
5,250 |
In addition to these manufacturing costs, Willox is able to isolate the following costs associated with the EESS.
|
Year 0 $ |
Year 1 $ |
Year 2 $ |
Year 3 $ |
|
|
Research and Development |
17,000 |
|||
|
Product Design |
10,000 |
|||
|
Process Design |
15,000 |
5,000 |
3,000 |
|
|
Tooling Costs |
20,000 |
|||
|
Marketing Costs |
8,000 |
12,000 |
6,000 |
8,000 |
|
Warranty Costs |
10,000 |
4,000 |
1,000 |
|
|
After Sales Service |
3,000 |
5,500 |
2,000 |
Required:
1.Assess the profitability of the EESS in years 1, 2 and 3 using the conventional approach, which includes manufacturing costs only.
2.Assess the profitability of the EESS based on its life cycle costs.
3.Given this information, what action should the managing director take when considering future products?
4.Critically discuss the advantages and disadvantages of developing lifecycle budgets for proposed new products.
5.What other performance measures might the company introduce to manage its new product development more effectively?
