Cordless Hooded Hair Dryer: Accounting Cost Systems and Cost Behavior

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Table of Contents

Product Idea
Cost Estimates
Selling Price
Expectations of Growth and Potential Profit
Conclusion
References

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.

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.

Description	Fixed Cost
	($)
Administrative Salaries	100,000
Marketing Expense	200,000
R&D Expense	200,000
Total Fixed Cost	500,000

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.

Description	Cost Per Unit
	($)
Cover	3.50
Side Cover	1.20
Nozzle	1.40
Motor	2.40
Fan	2.50
Mica Sheet	1.75
Heating Coils	2.90
Bracket	0.70
Switch	1.00
Electrical wire	0.80
Battery	1.35
Third-Party Manufacturer	3.50
Total Variable Cost	23.00

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.

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 1	Year 2	Year 3
Sales Revenue	2,500,000	3,000,000	3,600,000
Variables Costs	1,000,000	1,200,000	1,440,000
Gross Profit	1,500,000	1,800,000	2,160,000
Fixed Costs	500,000	525,000	551,250
Earnings Before Interest and Tax	1,000,000	1,275,000	1,608,750

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.

References

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

ReportBuyer. (2018). Global hair dryer market 2018-2022. Web.

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

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