CHITKARA BUSINESS SCHOOL,
CHITKARA UNIVERSITY, PUNJAB
PERFORMANCE MANAGEMENT
CML 3201
PROJECT-LIFE CYCLE COSTING
LIFE CYCLE COSTING
Life cycle costing is defined as the total cost throughout its life including planning, design, acquisition & support costs & any other costs directly attributable to owing / using the asset.
Category of LCC capital assets:
• Initial costs
• Operating costs
• Disposal costs
SIMPLE FORMULA FOR LCC
LCC= Capital + Lifetime operating cost + Lifetime maintenance cost + Disposal cost –Residual value
NUMERICAL EXAMPLE
1. A company is planning a new product. Market research information suggests that the product should sell 10,000 units at RM21/ units. The company seeks to make a mark-up of 40% product costs. …show more content…
Required
Calculate the cost per unit looking at the whole life cycle and comment on the suggested price.
SOLUTION-
R&D (1,900 + 100) $‘000
2,000
Marketing (100 + 75 + 50 + 10) 235 Production (1,000 + 6,750 + 8,000 + 2,250) 18,000 Customer service (100 + 600 + 800 + 200) 1,700 Disposal 300 Total lifecycle costs 22,235 Total production ('000 units) 42 Cost per unit 529.40
The total lifecycle costs are $529.40 per solar panel which is higher than the price proposed by the marketing director. Solaris will either have to charge a higher price or look at ways to reduce costs.
It may be difficult to increase the price if customers are price sensitive and are not prepared to pay more. Costs could be reduced by analysing each part of the costs throughout the life cycle and actively seeking cost savings. For example, using different materials, using cheaper staff or acquiring more efficient
CHITKARA UNIVERSITY, PUNJAB
PERFORMANCE MANAGEMENT
CML 3201
PROJECT-LIFE CYCLE COSTING
LIFE CYCLE COSTING
Life cycle costing is defined as the total cost throughout its life including planning, design, acquisition & support costs & any other costs directly attributable to owing / using the asset.
Category of LCC capital assets:
• Initial costs
• Operating costs
• Disposal costs
SIMPLE FORMULA FOR LCC
LCC= Capital + Lifetime operating cost + Lifetime maintenance cost + Disposal cost –Residual value
NUMERICAL EXAMPLE
1. A company is planning a new product. Market research information suggests that the product should sell 10,000 units at RM21/ units. The company seeks to make a mark-up of 40% product costs. …show more content…
Required
Calculate the cost per unit looking at the whole life cycle and comment on the suggested price.
SOLUTION-
R&D (1,900 + 100) $‘000
2,000
Marketing (100 + 75 + 50 + 10) 235 Production (1,000 + 6,750 + 8,000 + 2,250) 18,000 Customer service (100 + 600 + 800 + 200) 1,700 Disposal 300 Total lifecycle costs 22,235 Total production ('000 units) 42 Cost per unit 529.40
The total lifecycle costs are $529.40 per solar panel which is higher than the price proposed by the marketing director. Solaris will either have to charge a higher price or look at ways to reduce costs.
It may be difficult to increase the price if customers are price sensitive and are not prepared to pay more. Costs could be reduced by analysing each part of the costs throughout the life cycle and actively seeking cost savings. For example, using different materials, using cheaper staff or acquiring more efficient