Page 5 - MCS August Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

For instance, it may reveal that the operation of Montel‐branded shops is not profitable due to
the high overheads incurred on rent, rates and other shop running costs compared to the other
channels.

Knowing this, management would then have to take a decision on how to improve profitability.

It may mean that they decide to carry on running the shops to maintain the brand if they feel that
having their own shops is a measure of high quality.

Perhaps they would instead try and reduce costs, perhaps by moving the shops to lower rent
areas.

They may even decide to shut down the shops completely and rely on third‐party specialists
instead.

The distribution channel analysis itself doesn’t improve profitability but it provides management
with a different picture of profitability and allows them to make better decisions as a result.

Financial Manager

TASK 3 LIFE‐CYCLE COSTING AND PRODUCT PRICING

To: Senior financial manager

From: Financial manager
Date: Today
Subject: Life‐cycle costing and product pricing

Life‐cycle costing

Life‐cycle costing is the accumulation of costs for activities that occur over the entire life‐cycle of a
product, from inception to abandonment.

This means that a product’s life‐cycle cost will include such items as the initial research and
development expenditure as well as the costs of scrapping any leftover product and
decommissioning production lines at the end of the product’s life.

Use of life‐cycle costing allows businesses to be more forward thinking. By creating an
expectation of the entire set of costs for a product before it is put into production, it allows the
business to anticipate cost issues and target cost reduction before costs are locked into place.

When a new camera model is first being considered, its method of production, the number of
components, the material types to be used, along with many other factors will not necessarily be
already pre‐determined.

Once these factors have been decided upon, many of the lifetime costs of the product are
essentially locked into place and would be very difficult to change further down the line.

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