Use the information below to answer the following question(s).Satellite Inc.is in the process of evaluating its new products.A new signal receiver has two production runs each year, each with $20,000 in setup costs.The new receiver incurred $60,000 in development costs and is expected to be produced for three years.The direct costs of producing the receivers are $80,000 per run of 5,000 receivers.Indirect manufacturing costs charged to each run are $90,000.Destination charges for each receiver average $2.00.Customer service expenses average $0.40 per receiver.The receivers are going to sell for $50 the first year and increase by $6 each year thereafter.Sales units equal production units each year.
-What is the Satellite Inc.life cycle operating income?

Question

Quizplus · Accepted Answer

The life cycle operating income is the total operating income over the life of the product. The operating income for each year is the difference between the revenue and the total costs. The revenue is the number of units sold multiplied by the selling price. The total costs are the sum of the direct costs, indirect costs, destination charges, and customer service expenses. The direct costs are the costs that vary with the number of units produced. The indirect costs are the costs that do not vary with the number of units produced. The destination charges are the costs of shipping the product to the customer. The customer service expenses are the costs of providing customer support.In this case, the number of units sold each year is 5,000. The selling price is $50 in the first year and increases by $6 each year thereafter. The direct costs are $80,000 per run of 5,000 receivers. The indirect costs are $90,000 per run. The destination charges are $2.00 per receiver. The customer service expenses are $0.40 per receiver.The operating income for each year is as follows:Year 1:Revenue: 5,000 * $50 = $250,000Total costs: $20,000 + $80,000 + $90,000 + $2.00 * 5,000 + $0.40 * 5,000 = $202,400Operating income: $250,000 - $202,400 = $47,600Year 2:Revenue: 5,000 * $56 = $280,000Total costs: $20,000 + $80,000 + $90,000 + $2.00 * 5,000 + $0.40 * 5,000 = $202,400Operating income: $280,000 - $202,400 = $77,600Year 3:Revenue: 5,000 * $62 = $310,000Total costs: $20,000 + $80,000 + $90,000 + $2.00 * 5,000 + $0.40 * 5,000 = $202,400Operating income: $310,000 - $202,400 = $107,600The life cycle operating income is the sum of the operating income for each year, which is $47,600 + $77,600 + $107,600 = $232,800.

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