Question

10. (Short Answer) Grace Greeting Cards Incorporated is starting a new business venture and are in the process of evaluating its product lines. Information for one new product, traditional parchment grade cards, is as follows: ∙Sixteen times each year, a new card design will be put into production. Each new design will require $600 in setup costs. ∙The parchment grade card product line incurred $75,000 in development costs and is expected to be produced over the next four years. ∙Direct costs of producing the designs average $0.50 each. ∙Indirect manufacturing costs are estimated at $50,000 per year. ∙Customer service expenses average $0.10 per card. ∙Current sales are expected to be 2,500 units of each card design. Each card sells for $3.50. ∙Sales units equal production units each year. A. What are the estimated life-cycle revenues? B. What is the estimated life-cycle operating income for the first year? C. What is the estimated life-cycle operating income per year for the years after the first year? D. What is the total estimated life-cycle operating income?

Answer 1

A. What are the estimated life-cycle revenues?
Estimated life-cycle revenues:
2,500 Sales units *16 designs per year * 3.50 per card sold * 4 years	560000
B. What is the estimated life-cycle operating income for the first year?
Annual revenue
2,500 Sales units *16 designs per year * 3.50 per card sold	140000
Development costs	75000
Setup costs ($600× 16)	9600
Direct manufacturing costs (2,500 × $0.50 × 16)	20000
Indirect manufacturing costs	50000
Customer service costs (0.10 × 2,500 cards × 16)	4000
Estimated life-cycle operating income (loss) for the first year	-18600
C. What is the estimated life-cycle operating income per year for the years after the first year?
Annual revenues (2,500 × $3.50 × 16)	140000
Setup costs ($600× 16)	9600
Direct manufacturing costs (2,500 × $0.50 × 16)	20000
Indirect manufacturing costs	50000
Customer service costs ($0.10 × 2,500 cards × 16)	4000
Estimated life-cycle operating income (loss) for the first year	56400
D. What is the total estimated life-cycle operating income?
Estimated life-cycle operating income for all four years (3 × $56,400 - $18,600)	150600