Ellipsis Electrocs Ltd produces speakers for high fidelity sound systems. Because of the rapid rate of technological innovation in the hi-fi market, most of the company’s products have short life cycles. The marketing manager, Jean Wills, believes that new product introductions are the key to Ellipsis’s success However, the managing director, Joseph lacopetta, is concerned that the frequent changes in product lines are eroding the company’s profitability. He believes that many of the new products have such short life cycles that they never fully recover their costs. He asks the management accountant, Stan Willox, to help him.
Willox decides to review the profitability of the Easy Ear Speaker System (EESS), which has just been phased out after only three years on the market. First, Willox prepares an analysis of the profitability of the EESS:
In addition to these manufacturing costs, Willox is able to isolate the following costs associated the EESS:
1. Assess the profitability of the EESS in years 1, 2 and 3 including only the manufacturing costs.
2. Assess the profitability of the EESS based on its life cycle costs.
3. Given this information, what action should lacopetta take when considering future products?
4. Discuss the advantages and disadvantages of developing life cycle budgets for proposed new products?
5. What other performance measures might the company introduce to manage its new product development more effectively?