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ACCA Applied Skills · Performance Management · Life-cycle costing

Marlow Ltd is considering spending an extra $50,000 at the design stage of a product. This is expected to cut production costs by $4 per unit over a lifetime volume of 30,000 units, and to reduce post-sale warranty costs by $10,000. Ignoring the time value of money, what is the net life cycle saving from the extra design spend?

The net life cycle saving is $80,000. The extra design spend of $50,000 produces production savings of $120,000 and post-sale savings of $10,000, a total of $130,000. Deducting the additional design cost leaves $80,000, showing the benefit of spending more early in the life cycle.

  1. A$80,000Correct
  2. B$70,000
  3. C$130,000
  4. D$180,000

Explanation

Production saving is 30,000 × $4 = $120,000. Add the warranty saving of $10,000 for total savings of $130,000, then deduct the extra design spend of $50,000 to give $80,000. $70,000 ignores the warranty saving, $130,000 ignores the extra spend, and $180,000 wrongly adds the extra spend.

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