Question

Sephora Ltd. is a well-known manufacturer of high tech products. The president of Sephora has decided he would like to manufacture a new design, the Palette. Based on his experience in the industry, he believes the new product will be a popular item for four years, after which it will be obsolete due to new technology.

Design costs budgeted to be $400,000. Fixed production costs budgeted to be $7,500 per month. Fixed marketing costs will be $2,000 per month for the first three years, dropping to $500 per month for the last year. Fixed distribution costs will be $2,000 per month for the first three years, and $1,000 per month for the last year.

Variable production costs will be $250 per unit for all four years. Variable distribution costs will be $20 per unit for the first three years, and $24 per unit for the last year. There are no variable marketing costs.

Sephora expects to sell 40 units per month at $1,500 each for the first three years, dropping to 10 units per month at $1,250 in the last year before the product becomes obsolete.

Required:                            Show all calculations for full marks

1. Prepare a Projected Life-cycle Income Statement for the new product line.

2. How much profit, on average, will Sephora make on each Palette?

(Round your answer to the nearest cent, i.e. 2 decimal places) (4 Mark)

Answer 1

a. Statement showing the Projected Life-cycle Income Statement for the new product line:

Particulars	Year 1	Year 2	Year 3	Year 4	Total
a. Sales units per month	40 units	40 units	40 units	10 units
b. Life Cycle Yearly sales units (a * 12)	480 units	480 units	480 units	120 units	1,560 units
c. Life Cycle Selling price per unit	$1,500	$1,500	$1,500	$1,250
d. Life Cycle Sales Revenue (b * c)	$720,000	$720,000	$720,000	$150,000	$2,310,000
e. Life Cycle Functional Costs:
Design costs					$400,000
Fixed Production costs ($7,500 * 12)	$90,000	$90,000	$90,000	$90,000	$360,000
Fixed marketing costs	$24,000 ($2,000 * 12)	$24,000 ($2,000 * 12)	$24,000 ($2,000 * 12)	$12,000 ($1,000 * 12)	$84,000
Variable Production costs	$120,000 (480 * $250)	$120,000 (480 * $250)	$120,000 (480 * $250)	$30,000 (120 * $250)	$390,000
Variable Distribution costs	$9,600 (480 * $20)	$9,600 (480 * $20)	$9,600 (480 * $20)	$2,880 (120 * $24)	$31,680
Life Cycle Total Costs					$1,265,680
f. Life Cycle net operating income (d - e)					$1,044,320

Average profit Sephora make on each Palette will be:

Life Cycle net operating income = $1,044,320

Total budgeted units sales for the entire Life-cycle = 1,560 Palettes

Average profir per palettes = $1,044,320 / 1,560 Palettes = $669.44 per Palette