Reference no: EM132833693
Question - Coldarin designs, develops and sells PC games. Games have a short lifecycle lasting around 3 years only. Performance of the games is measured by reference to the profits made in each of the expected three years of popularity. Coldarin accepts a net profit of 25% of turnover as reasonable. A rate of contribution of 75% is also considered acceptable.
Coldarin has a large centralised development department which carries out all the design work before it passes the completed games to the sales and distribution department to market and distribute the product.
Coldarin has developed a brand-new game called PCD and this has the following budgeted performance figures.
The selling price of PCD will be a constant £50 per game. Analysis of the costs show that at a volume of 10,000 units a total cost of £130,000 is expected. However, at a volume of 14,000 units a total cost of £150,000 is expected. If volume exceed 15,000 units the fixed costs will increase by 50%.
PCD's budgeted volumes are as follows:
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Year 1
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Year 2
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Year 3
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Sales volume
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7,500 units
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16,800 units
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4,200 units
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In addition, marketing costs for PCD will be £80,000 in year one and £50,000 in year two. Design and development costs are all incurred before the game is launched and has a cost of £400,000 for PCD. These costs are written off to the income statement as incurred (i.e. before year 1 above).
Required -
1. Explain the principles behind lifecycle costing and briefly state why Coldarin in particular should consider these life cycle principles.
2. Produce the budgeted results for PCD and briefly assess the game's expected performance, taking into account the whole lifecycle of the game.
3. Explain why incremental budgeting is a common method of budgeting and outline the main problems with such an approach.