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Question 2: Managing costs: ABM and Life-cycle costing [28 marks] Cool Breeze limited produces environmentally friendly air conditioning system for its local and international market. The design department is currently working on two potential product lines: Alphacore and Hypercore models. The marketing department of Cool Breeze has recommended that the company should introduce the Hypercore model. To compete effectively with existing models offered by other companies, Hypercore would need to be priced at $1,920. The company requires a target profit margin for all new products of at least 40 per cent of sales. The technology in solar energy is developing rapidly, and therefore the Hypercore is expected to be obsolete within three years of entering the market. Initial estimates of the Hypercore's cost of manufacture per unit are: Direct material $ 600 Direct labour 300 Manufacturing over head 300 $1,200 * Manufacturing overhead is applied at 100 per cent of direct labour cost. The marketing department is keen to introduce the Hypercore as soon as possible. However, the management accountant is concerned about the non-manufacturing psts likely to be associated with the new product. He asks the departments that are upstream and downstream of manufacturing to estimate the costs in their departments related to the development, production and sale of the Hypercore. He receives the following information: Estimated costs associated with the proposed Hypercore (in $'000s) Department Year 1 Year 2 Year 3 Year 4 Year 5 Research and development 3,600 Product and process design 7,200 1,680 Marketing 2,400 1,920 1,200 960 Customer support 600 1,920 1,800 480 The forecast sales of the Hypercore are as follows: Year 2 12,000 units Year 3 18,000 units Year 4 6,000 units Required: Question 2.1 Calculate the target cost for the Hypercore that will meet the target seling price of $1,920 and the target profit margin of 40 per cent on sales. Based on your calculation, would you recommend the development and introduction of the Hypercore model? Explain Word limit for foter port: 100 words. Note the word count of the end of your answer 7 maria) Your Answer Target cost Show your workings here expand the space as required): Word count: Question 2.2 Prepare a life cycle budget for the Hypercore that covers each year from year 1 to year 5 Based on your calculation, would you recommend the development and introduction of the Hypercore model? Word limit for later part: 100 words. Note the word count at the end of your answer (14 marks) Your Answer (Insert rows/columns and expand the space as required); Word count: Question 2.3 What other information might the company need to undertake a complete profitability analysis of the Hypercore air conditioning system? Explain Word limit: 200 words. Note the word count at the end of your answer 17 marks Your Answer expand the space as required)

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