Reference no: EM132614633
the company produces a new products for its local and international market. The design department is currently working on two potential product lines: ProductA and ProductB. Both product lines are estimated to have a life cycle of three years- one year of design and development and two years on the retail market. The marketing department is keen to introduce both, as they may complement to each other, however, the company may not have enough capacity to produce both. The company accountant reviewed the budget estimate for both of the product lines and estimated their profitability for each year in the retail market as fellows:
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Product A
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Product B
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Total
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Sales
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$2,015,000
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$1,350,000
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3,365,000
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Cost of goods sold
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$(1,300,000)
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$(1,005,000)
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2,305,000
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Gross margin
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$715,000
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$345,000
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1,060,000
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After receiving the profitability statement from the compamy's accountant, Jenny, the marketing manager of the company comments that product A is more profitable product and that perhaps cost-cutting measures should be applied to ProductB. However , the company accountant is concerned about some of the other costs he has uncovered. For both products, she has figured out that the total design and development costs in year 1 are $1,100,000 and the total selling expenses are $100,000 per year for the year 2 and 3. Moreover , she has pointed out that both the design and development and selling expenses are substantially higher for Product A because it is relatively a new product, including the high selling and design and development expenses. She has assured senior managers that the product A investment will pay off in improved profits for the firm.
Problem 1: Discuss the importance and limitations of developing life cycle budgets for the new product. explain why Jenny may be wrong in her assessment of the relative performance of the two products.
Problem 2: What other information that the company might need to undertake a complete profitability analysis of two products? Discuss.
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