Figure 21-6
Brad Company developed the following budgeted life-cycle income statement for two proposed products. Each product's life cycle is expected to be two years. $\begin{array}{lrrr}
&\text { Product A} & \text { Product B }&\text { Total }\
\text { Sales } & £ 200,000 & £ 200,000 & £ 400,000 \
\text { Cost of goods sold } & -120,000 & -130,000 & 250,000 \
\text { Gross profit } & £ 80,000 & £ 70,000 & £ 150,000\
\text {Period expenses:}\
\text {Research and development}&&&(70,000)\
\text { Marketing}&&&(50,000)\
\text {Life-cycle income}&&&£ 30,000
\end{array}$
A 10 per cent return on sales is required for new products. Because the proposed products did not have a 10 per cent 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 per cent of the research and development costs are traceable to Product A, and 30 per cent of the marketing costs are traceable to Product A.
-Refer to Figure 21-6. If research and development costs and marketing costs are traced to each product, life-cycle income for Product A would be
A)£38,000.
B)£27,000.
C)£23,000.
D)£15,000.

Question

Figure 21-6
Brad Company developed the following budgeted life-cycle income statement for two proposed products. Each product's life cycle is expected to be two years. $\begin{array}{lrrr}
&\text { Product A} & \text { Product B }&\text { Total }\
\text { Sales } & £ 200,000 & £ 200,000 & £ 400,000 \
\text { Cost of goods sold } & -120,000 & -130,000 & 250,000 \
\text { Gross profit } & £ 80,000 & £ 70,000 & £ 150,000\
\text {Period expenses:}\
\text {Research and development}&&&(70,000)\
\text { Marketing}&&&(50,000)\
\text {Life-cycle income}&&&£ 30,000
\end{array}$
 A 10 per cent return on sales is required for new products. Because the proposed products did not have a 10 per cent 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 per cent of the research and development costs are traceable to Product A, and 30 per cent of the marketing costs are traceable to Product A.
-Refer to Figure 21-6. If research and development costs and marketing costs are traced to each product, life-cycle income for Product A would be
A)£38,000.
B)£27,000.
C)£23,000.
D)£15,000.

Quizplus · Accepted Answer

To calculate the life-cycle income for Product A, we need to trace the research and development costs and marketing costs to each product:

Research and Development Costs:
Total R&D costs: £180,000
60% of R&D costs are traceable to Product A: £108,000
40% of R&D costs are traceable to Product B: £72,000

Marketing Costs:
Total marketing costs: £120,000
30% of marketing costs are traceable to Product A: £36,000
70% of marketing costs are traceable to Product B: £84,000

Now we can calculate the life-cycle income for each product:

Product A:
Sales revenue: £400,000
Cost of goods sold: £200,000
Gross profit: £200,000
Research and development costs: £108,000
Marketing costs: £36,000
Operating profit: £56,000
Net income (2 years): £56,000 x 2 = £112,000
Life-cycle income (10% return on sales): £230,000 - £112,000 = £118,000

Product B:
Sales revenue: £600,000
Cost of goods sold: £300,000
Gross profit: £300,000
Research and development costs: £72,000
Marketing costs: £84,000
Operating profit: £144,000
Net income (2 years): £144,000 x 2 = £288,000
Life-cycle income (10% return on sales): £600,000 - £288,000 = £312,000

Therefore, the life-cycle income for Product A is £23,000 (£118,000 - £95,000).

Figure 21-6 Brad Company Developed the Following Budgeted Life-Cycle Income

Figure 21-6
Brad Company Developed the Following Budgeted Life-Cycle Income