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Strategic Cost Management · Product Life Cycle Costing

Life Cycle Costing Numerical Problems with Solved Examples

Updated 11 October 2026 · Fact-checked

Life cycle costing numericals ask you to add all costs of a product from design to withdrawal, often discounted to present value, and compare them with lifetime revenue. Total life cycle cost ÷ total lifetime units gives cost per unit. Lifetime revenue minus total life cycle cost gives lifetime profit.

Understand Life Cycle Costing Numerical Problems

A product earns revenue only in its selling years. But it costs money before launch (research, design, development, tooling) and after sale (warranty, disposal). Traditional reports look at one year at a time and can hide these costs. Life cycle costing collects them over the whole life of the product.

In a numerical, you usually get costs split by stage: pre-production (R&D, design, testing), production and sales (material, labour, overheads, marketing), and post-sale (warranty, servicing, decommissioning). Some costs are lump sums. Others are per unit. Treat them separately.

The first skill is the lifetime view. Add the lump sums and the unit-linked costs over all years. Then divide by total units sold over the life, not one year's units. This gives the full cost per unit, which should be recovered by the price.

The second idea is cost commitment versus cost incurrence. Commitment is when design decisions lock in future costs. Incurrence is when cash is actually spent. Most of the cost is locked in during design, though little cash has gone out by then. So the exam may ask which stage offers the most scope for cost reduction. The answer is the early design stage.

The third idea is time value of money. If the question gives a discount rate, discount each year's cash flow to present value before adding. Then compare discounted cost with discounted revenue. If no rate is given, use simple totals.

Key rules to remember

Total life cycle cost
Total LCC = Pre-production costs + Production and selling costs + Post-sale costs
Include every stage. Use discounted values if a rate is given.
Life cycle cost per unit
LCC per unit = Total LCC ÷ Total units produced and sold over the life
Use lifetime units, not one year's units.
Lifetime profit
Lifetime profit = Total lifetime revenue − Total LCC
Check whether the question wants discounted or undiscounted profit.
Present value of a cash flow
PV = Cash flow × 1 ÷ (1 + r)^n
Use the discount factors given in the question. Do not mix timing conventions.
Cost commitment percentage
Cumulative committed % = Cumulative committed cost ÷ Total life cycle cost × 100
Compare with cumulative incurred % to show that commitment runs ahead of spending.

How to solve Life Cycle Costing Numerical Problems questions

Use this order for any life cycle costing question. It keeps your working clean and shows the examiner each stage.

  1. 1Read the data and list costs under three heads: pre-production, production and selling, and post-sale.
  2. 2Mark each cost as a lump sum or a per-unit rate. Find the lifetime units for the per-unit costs.
  3. 3Check whether a discount rate is given. If yes, note which year each cash flow falls in.
  4. 4Compute each stage's cost in a small table. Discount if required.
  5. 5Add the stages to get total life cycle cost. Divide by lifetime units for cost per unit.
  6. 6Compute lifetime revenue (units × price, discounted if needed) and subtract total cost to get lifetime profit.
  7. 7If asked, compare the cost per unit with the price or target cost, and state a clear recommendation.
  8. 8If asked about commitment and incurrence, show cumulative percentages by stage and comment on the gap.

Quickest way: Three-line total and divide

When to use it: Use when no discount rate is given and you only need cost per unit or lifetime profit.

  1. Add all lump sums first (R&D, design, tooling, disposal) into one figure.
  2. Multiply the per-unit costs by total lifetime units and add them to the lump sums.
  3. Divide by lifetime units for cost per unit. Deduct from lifetime revenue for profit.

Common mistakes in Life Cycle Costing Numerical Problems

  • Dividing total life cycle cost by one year's units.

    Students get used to annual costing and take the current year's volume.

    Fix: Always divide by total units over the whole life, as the lump sums are spread over all of them.

  • Leaving out pre-production or post-sale costs.

    These costs sit in separate lines of the question and look like background data.

    Fix: List all three stages in your table before computing anything.

  • Adding cash flows of different years without discounting when a rate is given.

    Students rush to the totals.

    Fix: Apply the discount factor to every year's flow first, then total. Show the factor in your working.

  • Confusing cost commitment with cost incurrence.

    Both words suggest the cost is spent.

    Fix: Commitment means the cost is locked in by decisions. Incurrence means cash is spent. Commitment is early, incurrence is later.

  • Dividing discounted cost by undiscounted units, or the reverse, without saying so.

    Students mix methods halfway.

    Fix: Use undiscounted units unless the question states otherwise, and state your basis in one line.

Worked examples

Example 1

Ravi Appliances plans a new mixer. R&D and design cost ₹8,00,000 and tooling costs ₹4,00,000, both before launch. Over its life it will sell 20,000 units. Variable production and selling cost is ₹600 per unit. Warranty is ₹40 per unit. Withdrawal and disposal cost ₹1,00,000 at the end. Selling price is ₹1,000 per unit. Ignore the time value of money. Find the total life cycle cost, cost per unit and lifetime profit.

Show the solution
  1. Pre-production cost = ₹8,00,000 + ₹4,00,000 = ₹12,00,000.
  2. Production and selling cost = 20,000 × ₹600 = ₹1,20,00,000.
  3. Warranty cost = 20,000 × ₹40 = ₹8,00,000.
  4. Post-sale cost = ₹8,00,000 + ₹1,00,000 = ₹9,00,000.
  5. Total LCC = ₹12,00,000 + ₹1,20,00,000 + ₹9,00,000 = ₹1,41,00,000.
  6. Cost per unit = ₹1,41,00,000 ÷ 20,000 = ₹705.
  7. Lifetime revenue = 20,000 × ₹1,000 = ₹2,00,00,000.
  8. Lifetime profit = ₹2,00,00,000 − ₹1,41,00,000 = ₹59,00,000.

Answer: Total life cycle cost is ₹1,41,00,000, cost per unit is ₹705 and lifetime profit is ₹59,00,000.

Example 2

Meera Tech is evaluating a gadget over 2 years of sales. Design cost of ₹10,00,000 is paid now (year 0). Year 1: 5,000 units sold at ₹900 each, with cash cost ₹500 per unit. Year 2: 5,000 units sold at ₹900 each, with cash cost ₹500 per unit. Assume all flows fall at year end. Discount factors at 10%: year 1 = 0.909, year 2 = 0.826. Find the discounted lifetime profit.

Show the solution
  1. Year 0 cost = ₹10,00,000, with a factor of 1, so PV = ₹10,00,000.
  2. Year 1 revenue = 5,000 × ₹900 = ₹45,00,000. Cash cost = 5,000 × ₹500 = ₹25,00,000. Net = ₹20,00,000.
  3. PV of year 1 net = ₹20,00,000 × 0.909 = ₹18,18,000.
  4. Year 2 net is also ₹20,00,000. PV = ₹20,00,000 × 0.826 = ₹16,52,000.
  5. Total PV of net operating flows = ₹18,18,000 + ₹16,52,000 = ₹34,70,000.
  6. Discounted lifetime profit = ₹34,70,000 − ₹10,00,000 = ₹24,70,000.

Answer: The discounted lifetime profit is ₹24,70,000, so the gadget is worth launching on these figures.

Exam tips

  • Draw a small table with stage, cost and basis before calculating. It earns method marks even if a figure is wrong.
  • Read whether the question wants cost per unit, lifetime profit or both, and answer each separately.
  • When a discount rate is given, write the factor beside each figure. State your timing assumption.
  • For theory in the case scenario, link the number to a point: most cost is committed early, so design is the best place to cut cost.
  • End with a one-line recommendation that compares cost per unit with price or target cost.

Practice questions from Product Life Cycle Costing

Life Cycle Costing Numerical Problems in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Life Cycle Costing Numerical Problems: frequently asked questions

How do you calculate life cycle cost per unit?

Add all costs from design to disposal, discounted if a rate is given. Divide the total by the units produced and sold over the whole life. This shows the price needed to recover every cost.

What is the difference between cost commitment and cost incurrence?

Commitment is when decisions, mostly in design, lock in future costs. Incurrence is when the cash is actually spent. Commitment usually runs well ahead of incurrence.

Do I always discount in life cycle costing problems?

No. Discount only when the question gives a rate or discount factors. Otherwise use simple totals and state that you have ignored the time value of money.

Are post-sale costs part of life cycle cost?

Yes. Warranty, servicing, withdrawal and disposal costs belong to the total. Leaving them out understates cost per unit.