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Chapter 12: Problem 14

What are three benefits of using a product life-cycle reporting format?

Short Answer

Expert verified
Three benefits are improved strategic planning, enhanced financial control, and optimized product portfolio management.

Step by step solution

01

Understanding Product Life-Cycle Reporting

Product life-cycle reporting involves analyzing and documenting each stage that a product goes through, from development through retirement. These stages typically include introduction, growth, maturity, and decline. Recognizing these stages is crucial for businesses to strategize effectively.
02

Benefit One - Improved Strategic Planning

One benefit of using a product life-cycle reporting format is improved strategic planning. By understanding which stage a product is in, businesses can make informed decisions about marketing, production, and distribution strategies, ensuring resources are allocated efficiently.
03

Benefit Two - Enhanced Financial Control

Another advantage is enhanced financial control. This reporting format allows companies to predict revenue streams and costs associated with each stage of a product's life, enabling better budgeting and financial management.
04

Benefit Three - Optimized Product Portfolio Management

A third benefit is optimized product portfolio management. With product life-cycle reports, businesses can monitor their entire range of offerings, identify products that need innovation or retirement, and introduce new products at the right time to maintain a competitive edge.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Strategic Planning
Strategic planning in the context of the product life cycle revolves around crafting precise actions for each stage that a product experiences, from inception to its eventual decline. By recognizing the stage a product is in, companies can tailor their marketing efforts, adjust production levels, and optimize distribution. This ensures that the right amount of resources are devoted to supporting the product, reducing waste.
  • During the **introduction stage**, strategic planning might involve intensive promotional activities to increase product awareness.
  • In the **growth stage**, strategies could prioritize optimizing production processes to meet rising demand.
  • As the product reaches **maturity**, the focus could shift to differentiating the product from competitors.
  • Finally, in the **decline stage**, cost-cutting measures might be implemented as the product approaches market retirement.
Adapting strategic plans to the product's life cycle allows companies to be proactive and responsive to market changes, ensuring sustainability and profitability over time.
Financial Control
Financial control during product life cycle management involves keeping a firm grip on the financial trajectory of a product over different stages. The aim is to predict costs and revenue accurately, allowing businesses to make budgetary adjustments and forecasts that align with their financial goals.
This aspect becomes crucial as each phase of the product lifecycle presents unique financial challenges and opportunities:
  • **Introduction and Growth:** Initial costs may be high due to marketing and production ramp-up. Strategic financial planning here ensures that budgets are allocated efficiently to foster product establishment and expansion.
  • **Maturity:** During this phase, cash flows are often stable, making it easier to manage finances, though it's crucial to prepare for eventual decline.
  • **Decline:** Here, financial strategies might involve cost reduction to maximize profit margins until the product is retired.
Effective financial control ensures that companies not only maximize their profits through the lifecycle but also prepare adequately for future developments.
Portfolio Management
Portfolio management refers to the strategic oversight and organization of a company's collection of product offerings. In the realm of the product life cycle, it becomes essential to maintain balance by continuously evaluating and adjusting the product portfolio.
With life-cycle reports, businesses gain crucial insights allowing them to:
  • **Identify Underdogs and Stars:** Spot products that are performing well and those that might need more support or a revamp.
  • **Timing the Market:** Introduce new products while strategically ending underperforming ones, ensuring that the portfolio remains aligned with market trends and consumer demands.
  • **Resource Allocation:** Direct resources towards high-potential products while keeping less profitable ones in check to optimize overall return on investment.
Efficient portfolio management, informed by product life-cycle insights, helps a company not only remain nimble and competitive but also innovate continually, securing its position in the market.

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Most popular questions from this chapter

New Life Metal Recycling and Salvage has just been given the opportunity to salvage scrap metal and other materials from an old industrial site. The current owners of the site will sign over the site to New Life at no cost. New Life intends to extract scrap metal at the site for 24 months, and then will clean up the site, return the land to useable condition, and sell it to a developer. Projected costs associated with the project follow: $$\begin{array}{lllc} & & \text { Fixed } & \text { Variable } \\ \hline \text { Months 1-24 } & \text { Metal extraction and processing } & \$ 4,000 \text { per month } & \$ 100 \text { per ton } \\ \text { Months 1-27 } & \text { Rent on temporary buildings } & \$ 2,000 \text { per month } & \- \\ & \text { Administration } & \$ 5,000 \text { per month } & \- \\ \text { Months 25-27 } & \text { Clean-up } & \$ 30,000 \text { per month } & \- \\ & \text { Land restoration } & \$ 475,000 \text { total } & \- \\ & \text { cost of selling land } & \$ 150,000 \text { total } & - \end{array}$$ Ignore time value of money. 1\. Assuming that New Life expects to salvage 50,000 tons of metal from the site, what is the total project life cycle cost? 2\. Suppose New Life can sell the metal for \(\$ 150\) per ton and wants to earn a profit (before taxes) of \(\$ 40\) per ton. At what price must New Life sell the land at the end of the project to achieve its target profit per ton? 3\. Now suppose New Life can only sell the metal for \(\$ 140\) per ton and the land at \(\$ 100,000\) less than what you calculated in requirement 2. If New Life wanted to maintain the same mark-up percentage on total project life- cycle cost as in requirement \(2,\) by how much would it have to reduce its total project life-cycle cost?

\(\mathrm{R} \& \mathrm{C}\) Mechanical sells and services plumbing, heating, and air conditioning systems. \(\mathrm{R} \& \mathrm{C}^{\prime}\) s cost accounting system tracks two cost categories: direct labor and direct materials. \(R \& C\) uses a time-and-materials pricing system, with direct labor marked up \(100 \%\) and direct materials marked up \(60 \%\) to recover indirect costs of support staff, support materials, and shared equipment and tools, and to earn a profit. \(\mathrm{R} \& \mathrm{C}\) technician Greg Garrison is called to the home of Ashley Briggs on a particularly hot summer day to investigate her broken central air conditioning system. He considers two options: replace the compressor or repair it. The cost information available to Garrison follows: $$\begin{array}{lcc} & \text { Labor } & \text { Materials } \\ \hline \text { Repair option } & 5 \mathrm{hrs} & \$ 100 \\ \text { Replace option } & 2 \mathrm{hrs} & \$ 200 \\ \text { Labor rate } & \$ 30 \text { per hour } & \end{array}$$ 1\. If Garrison presents Briggs with the replace or repair options, what price would he quote for each? 2\. If the two options were equally effective for the three years that Briggs intends to live in the home, which option would she choose? 3\. If Garrison's objective is to maximize profits, which option would he recommend to Briggs? What would be the ethical course of action? R \& C technician Greg Garrison is called to the home of Ashley Briggs on a particularly hot summer day to investigate her broken central air conditioning system. He considers two options: replace the compressor or repair it. The cost information available to Garrison follows:

Describe value engineering and its role in target costing.

Target prices, target costs, value engineering, cost incurrence, locked-in costs, activity-based costing. Cutler Electronics makes an MP3 player, CE100, which has 80 components. Cutler sells 7,000 units each month for \(\$ 70\) each. The costs of manufacturing \(\mathrm{CE} 100\) are \(\$ 45\) per unit, or \(\$ 315,000\) per month. Monthly manufacturing costs are as follows. Cutler's management identifies the activity cost pools, the cost driver for each activity, and the cost per unit of the cost driver for each overhead cost pool as follows: $$\begin{array}{lccc} \begin{array}{l} \text { Manufacturing } \\ \text { Activity } \end{array} & \text { Description of Activity } & \text { cost Driver } & \begin{array}{c} \text { cost per Unit } \\ \text { of cost Driver } \end{array} \\ \hline \text { 1. Machining costs } & \text { Machining components } & \text { Machine-hour } & \text { \$4.50 per machine-hour } \\ & \text { capacity } & & \text { \$2 per testing-hour } \\ \text { 2. Testing costs } & \text { Testing components and final } & \text { Testing-hours } & \text { (inder } \\ & \text { product (Each unit of CE100 } & & \\ \text { 3. Rework costs } & \text { Correcting and fixing errors } & \text { Units of CE100 } & \text { \$20 per unit } \\ & \text { is tested individually.) } & \text { reworked } & \\ \text { 4. Ordering costs } & \text { Ordering of components } & \text { Number of orders } & \text { \$21 per order } \\ \text { 5. Engineering costs } & \text { Designing and managing of } & \text { Engineering-hour } & \text { \$35 per engineering-hour } \\ & \text { products and processes } & \text { capacity } & \end{array}$$ Cutler's management views direct material costs and direct manufacturing labor costs as variable with respect to the units of CE100 manufactured. Over a long-run horizon, each of the overhead costs described in the preceding table varies, as described, with the chosen cost drivers. The following additional information describes the existing design: a. Testing time per unit is 2.5 hours. b. \(10 \%\) of the CE100s manufactured are reworked. c. Cutler places two orders with each component supplier each month. Each component is supplied by a different supplier. It currently takes one hour to manufacture each unit of CE100. In response to competitive pressures, Cutler must reduce its price to \(\$ 62\) per unit and its costs by \(\$ 8\) per unit. No additional sales are anticipated at this lower price. However, Cutler stands to lose significant sales if it does not reduce its price. Manufacturing has been asked to reduce its costs by \(\$ 6\) per unit. Improvements in manufacturing efficiency are expected to yield a net savings of \(\$ 1.50\) per MP3 player, but that is not enough. The chief engineer has proposed a new modular design that reduces the number of components to 50 and also simplifies testing. The newly designed MP3 player, called "New CE100" will replace CE100. The expected effects of the new design are as follows: a. Direct material cost for the New CE100 is expected to be lower by \(\$ 2.20\) per unit. b. Direct manufacturing labor cost for the New CE100 is expected to be lower by \(\$ 0.50\) per unit. c. Machining time required to manufacture the New CE100 is expected to be 20\% less, but machine-hour capacity will not be reduced. time required for testing the New CE100 is expected to be lower by \(20 \%\). e. Rework is expected to decline to \(4 \%\) of New CE100s manufactured. f. Engineering-hours capacity will remain the same. Assume that the cost per unit of each cost driver for CE100 continues to apply to New CE100. 1\. Calculate Cutler's manufacturing cost per unit of New CE100. 2\. Will the new design achieve the per-unit cost-reduction targets that have been set for the manufacturing costs of New CE100? Show your calculations. 3\. The problem describes two strategies to reduce costs: (a) improving manufacturing efficiency and (b) modifying product design. Which strategy has more impact on Cutler's costs? Why? Explain briefly.

Apex Art has been requested to prepare a bid on 500 pieces of framed artwork for a new hotel. Winning the bid would be a big boost for sales representative Jason Grant, who works entirely on commission. Sonja Gomes, the cost accountant for Apex, prepares the bid based on the following cost information: Based on the company policy of pricing at \(125 \%\) of full cost, Gomes gives Grant a figure of \(\$ 151,250\) to submit for the job. Grant is very concerned. He tells Gomes that at that price, Apex has no chance of winning the job. He confides in her that he spent \(\$ 500\) of company funds to take the hotel's purchasing agent to a basketball playoff game where the purchasing agent disclosed that a bid of \(\$ 145,000\) would win the job. He hadn't planned to tell Gomes because he was confident that the bid she developed would be below that amount. Gomes reasons that the \(\$ 500\) he spent will be wasted if Apex doesn't capitalize on this valuable information. In any case, the company will still make money if it wins the bid at \(\$ 145,000\) because it is higher than the full cost of \(\$ 121,000\) 1\. Is the \(\$ 500\) spent on the basketball tickets relevant to the bid decision? Why or why not? 2\. Gomes suggests that if Grant is willing to use cheaper materials for the frame, he can achieve a bid of \(\$ 145,000 .\) The artwork has already been selected and cannot be changed, so the entire amount of reduction in cost will need to come from framing materials. What is the target cost of framing materials that will allow Grant to submit a bid of \(\$ 145\) assuming a target markup of \(25 \%\) of full cost? 3\. Evaluate whether Gomes' suggestion to Grant to use the purchasing agent's tip is unethical. Would it be unethical for Grant to redo the project's design to arrive at a lower bid? What steps should Grant and Gomes take to resolve this situation?
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