A manufacturing company which produces a range of products has developed a budget for the life-cycle of a new product, P. The information in the following table relates exclusively to product P:
Lifetime total Per unit
Design costs $800,000
Direct manufacturing costs $20
Depreciation costs $500,000
Decommissioning costs $20,000
Machine hours 4
Production and sales units 300,000
The company’s total fixed production overheads are budgeted to be $72 million each year and total machine hours are budgeted to be 96 million hours. The company absorbs overheads on a machine hour basis.
What is the budgeted life-cycle cost per unit for product P?
OAR for fixed production overheads ($72 million/96 million hours) = $0.75 per hour
Total manufacturing costs (300,000 units x $20) = $6,000,000
Total design, depreciation and decommissioning costs = $1,320,000
Total fixed production overheads (300,000 units x 4 hours x $0.75) = $900,000
Total life-cycle costs = $8,220,000
Life-cycle cost per unit ($8,220,000/300,000 units) = $27.40