Harry and Sally Are Starting a New Business Venture and Are

question 115

Essay

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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Definitions:

Analysis Of Variance

A test for the difference between two or more means. A simple analysis of variance (or ANOVA) has only one independent variable, whereas a factorial analysis of variance tests the means of more than one independent variable. One-way analysis of variance looks for differences between the means of more than two groups.

Slope

The measure of the steepness or incline of a line, defined as the ratio of the vertical change to the horizontal change between two points.

Regression Equation

A mathematical formula used to describe the relationship between a dependent variable and one or more independent variables.

Correlation Coefficient

A numerical index that reflects the relationship between two variables, specifically how the value of one variable changes when the value of the other variable changes.