Cordless Hooded Hair Dryer: Accounting Cost Systems and Cost Behavior Essay

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Product Idea

The proposed product is a Cordless Hooded Hair Dryer that can be charged at home and carried for traveling purposes without the hassle of finding an appropriate charging outlet. The new hairdryer will also have an operating battery life of 24 hours. The company will use a third-party manufacturing site for the production of this new product. It is expected to break through the fierce competition in the electronics industry and achieve growing sales.

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Cost Estimates

There are two types of costs involved in the production of the new hairdryer including fixed and variable costs. Fixed costs include administrative salaries, marketing, and R&D expenses related to the new product. Table 1 provides details of these fixed costs.

Table 1. Fixed Costs.

DescriptionFixed Cost
($)
Administrative Salaries100,000
Marketing Expense200,000
R&D Expense200,000
Total Fixed Cost500,000

The company will incur $530,000 per annum with no sales. Therefore, it is crucial that it makes sufficient sales of its hairdryer that could cover these fixed costs and generate a profit.

Variable costs include the cost of components and third-party manufacturing charges per unit. Table 2 provides estimates of these variable costs.

Table 2. Variable Costs.

DescriptionCost Per Unit
($)
Cover3.50
Side Cover1.20
Nozzle1.40
Motor2.40
Fan2.50
Mica Sheet1.75
Heating Coils2.90
Bracket0.70
Switch1.00
Electrical wire0.80
Battery1.35
Third-Party Manufacturer3.50
Total Variable Cost23.00

The total variable cost is $23 per unit which will be used to determine the company’s contribution margin and its ability to attain the break-even level.

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Selling Price

The selling price of the new hairdryer will be based on the cost-plus-margin strategy (Drury, 2013). Moreover, the prices of similar hair dryers of other companies are reviewed and incorporated in the pricing decision. However, the company aims to disrupt the market by introducing a technologically advanced cordless hairdryer that gives the best results at a comparatively lower price than its competitors. The company’s existing hair dryer models with a cord are sold for between $35 and $40 on Amazon. Therefore, the price of this new product will be higher than its existing products. The company will set a profit margin of 150% and the selling price in the U.S. will be calculated as follows.

Selling Price = Variable Cost x (1 + Profit Margin)

Selling Price = $23 x (1 + 150%)

Selling Price = $57.50

Expectations of Growth and Potential Profit

The hairdryer market has been growing over the last ten years or so without any slowdown. Consumers are willing to pay for high-quality products that offer new and better features. Therefore, it could be stated that the demand for new models is unlikely to weaken. However, market conditions are challenging as competitors such as Dyson, Philips, and Panasonic have a strong market hold and share (ReportBuyer, 2018). Conair expects to achieve sales of $2.5 million in the first year and achieve a growth rate of 20% in the next two years. Variable costs are expected to increase by 2% and fixed costs will increase by 5% as well. The company’s sales and profit projections for this new product are given in Table 3.

Table 3. Sales and Profit Projections.

Year 1Year 2Year 3
Sales Revenue2,500,0003,000,0003,600,000
Variables Costs1,000,0001,200,0001,440,000
Gross Profit1,500,0001,800,0002,160,000
Fixed Costs500,000525,000551,250
Earnings Before Interest and Tax1,000,0001,275,0001,608,750

Conclusion

It could be concluded that the new product will generate a profit for Conair. It is proposed that the company should use a third-party manufacturer to avoid high fixed costs. The estimation of variable costs and selling price indicates that the new product will have a high contribution margin.

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References

Drury, C. (2013). Management and cost accounting (4th ed.). Berlin, Germany: Springer.

ReportBuyer. (2018). . Web.

Reverse Engineering of a HairDryer. (2014). Parts and functions. Web.

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IvyPanda. (2021, July 20). Cordless Hooded Hair Dryer: Accounting Cost Systems and Cost Behavior. https://ivypanda.com/essays/cordless-hooded-hair-dryer-accounting-cost-systems-and-cost-behavior/

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"Cordless Hooded Hair Dryer: Accounting Cost Systems and Cost Behavior." IvyPanda, 20 July 2021, ivypanda.com/essays/cordless-hooded-hair-dryer-accounting-cost-systems-and-cost-behavior/.

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IvyPanda. (2021) 'Cordless Hooded Hair Dryer: Accounting Cost Systems and Cost Behavior'. 20 July.

References

IvyPanda. 2021. "Cordless Hooded Hair Dryer: Accounting Cost Systems and Cost Behavior." July 20, 2021. https://ivypanda.com/essays/cordless-hooded-hair-dryer-accounting-cost-systems-and-cost-behavior/.

1. IvyPanda. "Cordless Hooded Hair Dryer: Accounting Cost Systems and Cost Behavior." July 20, 2021. https://ivypanda.com/essays/cordless-hooded-hair-dryer-accounting-cost-systems-and-cost-behavior/.


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IvyPanda. "Cordless Hooded Hair Dryer: Accounting Cost Systems and Cost Behavior." July 20, 2021. https://ivypanda.com/essays/cordless-hooded-hair-dryer-accounting-cost-systems-and-cost-behavior/.

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