The Algonquin Company developed the following budgeted life-cycle income statement for two proposed products. Each product's life cycle is expected to be two years. $\begin{array}{lrrr}&\text { Product A } & \text { Product B } & \text { Total }\
\text { Sales } & \$ 280,000 & \$ 200,000 & \$ 480,000 \
\text { Cost of goods sold } & 200,000 & 130,000 & 330,000 \
\text { Gross profit } & \$ 80,000 & \$ 70,000 & \$ 150,000\\text { Period expenses: }\\
\text {Research and development }&&&(70,000)\
\text {Marketing }&&&(50,000)\
\text { Life-cycle income}&&&\$30,000\
\end{array}$
A 10 percent return on sales is required for new products. Because the proposed products did not have a 10 percent return on sales, the products were going to be dropped.
Relative to Product B, Product A requires more research and development costs but fewer resources to market the product. Sixty percent of the research and development costs are traceable to Product A, and 30 percent of the marketing costs are traceable to Product A.
Return on sales for Product A would be

Question

The Algonquin Company developed the following budgeted life-cycle income statement for two proposed products. Each product's life cycle is expected to be two years. $\begin{array}{lrrr}&\text { Product A } & \text { Product B } & \text { Total }\
\text { Sales } & \$ 280,000 & \$ 200,000 & \$ 480,000 \
\text { Cost of goods sold } & 200,000 & 130,000 & 330,000 \
\text { Gross profit } & \$ 80,000 & \$ 70,000 & \$ 150,000\\text { Period expenses: }\\
 \text {Research and development }&&&(70,000)\
 \text {Marketing }&&&(50,000)\
 \text { Life-cycle income}&&&\$30,000\
\end{array}$
A 10 percent return on sales is required for new products. Because the proposed products did not have a 10 percent return on sales, the products were going to be dropped.
Relative to Product B, Product A requires more research and development costs but fewer resources to market the product. Sixty percent of the research and development costs are traceable to Product A, and 30 percent of the marketing costs are traceable to Product A.
Return on sales for Product A would be

Quizplus · Accepted Answer

The return on sales (ROS) for Product A is calculated by dividing its net income by its sales. First, allocate the research and development (R&D) and marketing costs to Product A based on the given percentages: R&D costs allocated to Product A = 60% of $70,000 = $42,000. Marketing costs allocated to Product A = 30% of $50,000 = $15,000. Total period expenses allocated to Product A = $42,000 (R&D) + $15,000 (Marketing) = $57,000. Subtract these allocated expenses from Product A's gross profit to find its net income: Net income for Product A = $80,000 (Gross profit) - $57,000 (Total period expenses) = $23,000. Finally, calculate the ROS for Product A: ROS for Product A = ($23,000 / $280,000) * 100 = 8.2%.

The Algonquin Company Developed the Following Budgeted Life-Cycle Income Statement