Illustrative Case II:

Sales Life-Cycle
Analysis
 ITEM THIS YEAR CHANGE OVER AVERAGE
LAST YEAR ANNUAL
CHANGE OVER
THE LAST 4 YRS

ANNUAL SALE P 2,000,000 1.5% 19.6%

UNIT SALES P 400 2.0 6.9

PRICE
UNIT PROFIT P 180 (0.8) 2.5

The management accountant at the Aeron Manufacturing

Company has collected these data in preparation for a sales life-
cycle analysis on one of its products, a leaf blower:
Required: Determine what stage of the sales life cycle the leaf
blower is in.

Solution to Illustrative Case II: Sales Life-Cycle Analysis

It seems that sales are stabilizing since they only grew 1.5%
over the past year and the average annual growth over the past
four years was 19.6%. The unit sales price has also showed, and
the unit profit its beginning decline. As a result, total profit is
starting to level off. Because of these signs, it seems that the
leaf blower is in the early maturity stage.
Illustrative Case III:
Strategic Costing
and Pricing
 Optic Care Inc. (OCI) manufactures specialized equipment for
polishing optical lenses. There are two models - one principally
used for fine eyewear (l-25) and another for lenses used in
binoculars, cameras and similar equipment (BL-10).

The manufacturing cost of each unit is calculated by activity-

based costing*,using these manufacturing cost pools:
 COST POOLS ALLOCATION COSTING RATE
BASE

Materials Handling Number Parts P 1.85 per part

Manufacturing Hours Machine Time P 11.40 per hour

Supervision
Assembly Number Parts P 2.55 per part

Machine Setup Each Setup P 43.30 per setup

Inspection and testing Logged Hours P 35 per hour

Packaging Logged Hours P 15 per hour

 OCI currently sells the BL-10 model for P1,050 and L-25
model for P725. Manufacturing costs and activity usage for two
products are:
B1-10 L-25
Direct Materials 111.50 48.30

Number Parts 96 77

Machine Hours 5.7 2.9

Inspection Time 10 0.5

Packing Time 0.7 0.4

Setups 1 1
Required:
1. Calculate the product cost and product margin for each product.
2. A new competitor has entered the market for lens polishing
equipment with a superior product at significantly lower prices –
P750 for the BL-10 model Ann P550 for the L—25 model. To try to
compete, OCI Has made some radical improvements in the design
and manufacturing of its two products. While the costing rates have
stayed the same, the materials costs and activity usage rates have
been decreased significantly :
 B1-10 L-25

Direct Materials 111.50 48.30

Number Parts 96 77

Machine Hours 5.7 2.9

Inspection Time 10 0.5

Packing Time 0.7 0.4

Setups 1 1
Calculate the total product cost with the new activity usage
data.
Can OCI make a profit with the new costs, assuming that OCI
must meet the price set by the new competitor?

3. What cost management method might be useful to OCI at this

time and why?
 Solution to
Illustrative Case III:
Strategic Costing and
Pricing
 Cost Pool Allocation Bas Costing Rate

Materials Handling Number of Parts 1.85

Mfg. Supervision Machine Hours 11.40

Assembly Number of Parts 2.55

Setups 43.50

Inspection and Test Hours 35.00

Packaging Hours 15.00

Cost and Activity Usage Current Received
for Each Product
BL-10 L-25 B1-10 L-25
Materials Handling 126.50 58.19 111.5 48.3

Mfg. Supervision 121.00 88.00 96.00 77.00

Assembly 6.10 3.20 5.70 2.90

Setups 1.30 0.60 1.00 0.50

Inspection and Test 0.70 0.40 0.70 0.40

Packaging 2.00 1.00 1.00 1.00

Activity Based
Rate
Materials 126.50 58.19 111.50 48.30
Materials Handling 1.85 223.85 162.80 177.60 142.45

Mfg. Supervision 11.40 69.54 36.48 64.98 33.06

Assembly 2.55 308.55 224.40 244.80 196.35
Setups 43.50 87.00 43.50 43.50 43.50
Inspection and 35.00 45.50 21.00 35.00 17.50
Test
Packaging 10.50 6.00 10.50 6.00
871.44 552.37 687.88 487.16
Price 1050.0 725.00 750.00 550.00
0
Margin 178.56 172.63 62.12 62.84
Target Costing
 Target costing is a technique in which the firm determines
the desired cost for the product or service, given a competitive
market price so the firm can earn a desired profit.

Target Cost = Competitive Price – Desired Profit

Target costing is a very way manage the needed trade-off

between increased functionality and higher cost.
FIGURE 8-4: TARGET COSTING IN THE COST LIFE CYCLE

Marketing and Customer

R&D Design Manufacturing
Distribution service

TARGET COSTING

With its positioning in the early, upstream phases of the cost life
cycle. Target Costing can clearly help a firm educe total costs.
Thank You!!!!
By: Nympha L. Roxas