Sue Company is considering the production of a new product.Sue Company has the following data available:
$\begin{array}{ll}
\text { Expected product life } & 4 \text { years } \
\text { Expected sales (units) over product life } & 2,000 \
\text { Variable production costs } & \$ 42 \text { per unit } \
\text { Variable selling costs } & \$ 16 \text { per unit } \
\text { Annual fixed production costs } & \$ 15,000 \
\text { Annual fixed selling costs } & \$ 5,000 \
\text { Research and development costs } & \$ 184,000 \
\text { Selling price } & \$ 200 \text { per unit }
\end{array}$
What is the expected profit or (loss)of the product over the product life cycle?
A) $(40,000)
B) $20,000
C) $204,000
D) $880,000

Question

Quizplus · Accepted Answer

To calculate the expected profit or loss over the product life cycle, we need to consider all revenues and costs associated with the product. 1. Total Revenue: Selling price per unit * Expected sales = $200 * 2,000 = $400,000.2. Total Variable Costs: (Variable production costs + Variable selling costs) * Expected sales = ($42 + $16) * 2,000 = $58 * 2,000 = $116,000.3. Total Fixed Costs: (Annual fixed production costs + Annual fixed selling costs) * Product life + Research and development costs = ($15,000 + $5,000) * 4 + $184,000 = $20,000 * 4 + $184,000 = $80,000 + $184,000 = $264,000.Expected Profit or Loss = Total Revenue - Total Variable Costs - Total Fixed Costs = $400,000 - $116,000 - $264,000 = $20,000.

Sue Company Is Considering the Production of a New Product