Question

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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.

	Product A	Product B	Total
Sales	$200,000	$200,000	$400,000
Cost of goods sold	120,000	130,000	250,000
Gross profit	$ 80,000	$ 70,000	$150,000
Period expenses:
Research and development			(70,000)
Marketing			(50,000)
Life-cycle income			$ 30,000

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.

              17a. If research and development costs and marketing costs are traced to each product, life-cycle income for Product A would be (Ans: $23,000)

              17b. If research and development costs and marketing costs are traced to each product, life-cycle income for Product B would be (Ans: $7,000)

              17c. What decision should Brad Company make about the two new products?

Answer 1

17a
	Product A
Net Income	80,000.00
Less: Research and development	42,000.00
Less: Marketing	15,000.00
Life Cycle Income	23,000.00

	Total cost	Product A
Research and development (60%)	70,000.00	42,000.00
Marketing(20%)	50,000.00	15,000.00
Life Cycle Costs		57,000.00

17b
	Product B
Total Life-cycle income	30,000.00
Less: Product A Life-cycle income	23,000.00
Life Cycle Income	7,000.00

17c- Brad Company should not discontinue Product A as it fulfilling the required rate of return by incurring additional research and incurring little on marketing.

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