Cost increases imposed by design changes intro­duced at different times during advancing stages of the product life cycle (PLC) usually rise dramati­cally as the change is introduced later in the life cycle of the product. Though the numbers vary from one industry to another, one cost-increase model looks something like the following:

Question

Hamound Industries designed, developed, and is now manufacturing for sales an improved version of its model GR1 smoke detector system that can be used on high speed trains, such as the TGV (Train à Grande Vitesse in French). The original estimates, developed during the conceptual design stage, are shown below. During the testing stage, a major safety flaw was discovered and significant design changes were made, affecting only the equipment first cost estimate, fortunately. Now, during manufacturing, a significant problem has emerged that makes the internet-connectivity feature difficult to manufacture with the level of required reliability. This change will increase the manufacturing cost per unit by a factor of 5. The initial economic analysis, conducted during the conceptual stage, using the AW value at i = 7% per year, showed very promising results. However, the design changes have affected this positive analy­sis. Use the original estimates and the PLC cost mul­tipliers summarized above to perform AW analyses for the four stages from conceptual through manufac­turing to determine what has happened to the eco­nomic viability of the improved product.

Answer 1

Testing stage: Equipment first cost increases to $-30,000,000; S remains at $600,000

Manufacturing stage: Unit cost to manufacture increases to 5*2.75 = $13.75; now a loss per unit of $1.00.



Conclusion: AW goes strongly negative to $-5.027 M per year when the manufacturing stage is entered.