When designing a project, the Marketing department must specify the target manufacturing unit cost of the desired product. Because this cost decreases over time with experience, the Marketing and R&D department have agreed to specify the transfer cost of the first 100,000 units of the new product. This cost is called the Base cost.
Base costs have no upper limit. If you indicate a high base cost, the R&D department will have more flexibility in finding the appropriate materials and manufacturing processes. Consequently, the project is easier to develop, and is less expensive in terms of the total development budget.
The lower limit of the base cost for a given project depends on its technical specifications: the more sophisticated a product is, the higher the minimum base cost will be. The higher the level of each attribute (Processing Power, Display Size, etc.), the higher the minimum unit cost. There is one exception to this rule: unit cost will increase if you try to reduce the carbon footprint of your product.
One strategy for choosing a base cost is to request that the R&D department develop the project at the minimum cost. This solution is highly attractive in terms of margins, but may be more expensive overall since its development budget is likely to be much higher than alternatives.
Another solution is to calculate the highest base cost economically achievable. You start from the desired or ideal price of the targeted consumers, i.e. the price that consumers are willing to pay for a product fitting their needs. The base cost is then obtained by subtracting the average distributor’s margin plus the margin that will make the future product economically attractive for you to market (including advertising and commercial team costs). A base cost calculated this way will be higher than the minimum one in many cases.
Finally, you may order a feasibility study to obtain an estimate of the minimum base cost and of the required development budget. Feasibility studies cost $100,000 and take one period to complete.