Rapid changes in technology and customer preferences

    Rapid changes in technology and customer preferences have shortened the product life cycle with a propensity of reducing profit margins for most products. SJG Inc. is planning to develop a new electric water pump with a two- year warranty. • Cost of product development: £ 200,000. • Cost of warranty repairs: £ 9 per repair, in 6 percent of the units, one year after sales (during and after the product life). • Fixed costs per annum are £ 110,000. • Cost of end of product-life responsibilities due to disposal requirements: £ 3 per unit, two years after sale. • Selling price: £ 40 per unit in year 1 and reduction of £5 each year thereafter. • Variable cost: £ 20 per unit in year 1 and reduction of £2 each year due to learning curve experience effects. • The projected sales volumes over a 3-year period are as follows: 12,000 units in the first year, and 24,000 and 6,000 units respectively for the following 2 years. Required: Prepare a product life cycle budget and advise the management whether SJG Inc.’s product should be discontinued after two years or not. Provide a reasoned basis for your advice.