Figure 11-4 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.
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.
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Refer to Figure 11-4. Return on sales for Product A would be

Question

Figure 11-4 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.
 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.
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Refer to Figure 11-4. Return on sales for Product A would be

Quizplus · Accepted Answer

To calculate the return on sales for Product A, we need to first calculate its total costs and total revenue.

Total costs for Product A: 
Research and development costs: $225,000 x 60% = $135,000 
Marketing costs: $300,000 x 30% = $90,000 
Manufacturing costs: $420,000

Total costs for Product A = $645,000

Total revenue for Product A: 
Year 1 revenue: $500,000 
Year 2 revenue: $1,200,000

Total revenue for Product A = $1,700,000

Profit for Product A: 
Profit = Total revenue - Total costs = $1,700,000 - $645,000 = $1,055,000

Return on sales for Product A: 
Return on sales = Profit / Total revenue x 100% = $1,055,000 / $1,700,000 x 100% = 62.06%

Since the required return on sales is 10%, Product A meets the requirement and can be pursued.

Figure 11-4 Brad Company Developed the Following Budgeted Life-Cycle Income