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compare the estimated production cost to the target cost discuss this comparison and 646270

(Product life cycles; writing) Sony Corp. launched its PlayStation 3 in late 2006. It was introduced at a price point of $599 for the top model. At the time of introduction, a California technology firm performed a tear down of the PlayStation and estimated its cost of production to be $839. Based on this cost estimate, the California tech firm estimated Sony was losing as much as $240 per unit sold.

a. Assume that Sony generates more profit on royalties from the games played on PlayStation than on the sales of PlayStation itself. In light of this explanation, is it rational for Sony to sell the PlayStation at a $240 loss? Explain.

b. How would setting the price of the PlayStation at $599, rather than the break even price of $839, likely affect (1) early life cycle sales and (2) total life cycle sales of PlayStation 3?

c. Is Sony’s pricing strategy (i.e., introductory price below production cost) more beneficial if the product’s life cycle is long or short? Explain.

47.

(Target costing) Gourmet Grade has just completed its work on a new microwave entrée. After consumer research was conducted, the marketing group has estimated the following quantities of the product can be sold at the following prices over its life cycle:

Year

Quantity

Selling Price

1

100,000

$2.50

2

250,000

2.4

3

350,000

2.3

4

500,000

2.1

5

600,000

$2.00

6

450,000

2

7

200,000

1.9

8

130,000

1.9

Initial engineering estimates of direct material and direct labor costs are $1.70 and $0.40, respectively, per unit. Variable overhead per unit is expected to be $0.50, and fixed overhead is expected to be $200,000 per year. Gourmet Grade’s management strives to earn a 25 percent gross margin on products of this type.

a. Estimate the target cost for the new entrée.

b. Compare the estimated production cost to the target cost. Discuss this comparison and how management might use the comparison to manage costs.

c. Based on your answer in (b), should Gourmet Grade begin production of the new entrée? Explain.

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