Harry and Sally are starting a new business venture and are in the process of evaluating their product lines. Information for one new product, hand-made lamps, is as follows:
∙ Every six months a new lamp pattern will be put into production. Each new pattern will require $8,000 in setup costs.
∙ The lamp product line incurred $40,000 in development costs and is expected to be produced over the next six years.
∙ Direct costs of producing the lamps average $144 each. Each lamp requires 12 labor-hours and 2 machine-hours.
∙ Indirect manufacturing costs are estimated at $168,000 per year.
∙ Customer service expenses average $16 per lamp.
∙ Current sales are expected to be 2,000 units of each lamp pattern. Each lamp sells for $300.
∙ Sales units equal production units each year.
Required:
| a. | What are the estimated life-cycle revenues? |
| b. | What is the estimated life-cycle operating income for the first year? |
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