
Concept explainers
Fisher designs, develops and sells many PC games. Games have a short lifecycle lasting around three years only.
Performance of the games is measured by reference to the profits made in each of the expected three years of popularity. Fisher accepts a net profit of 35% of turnover as reasonable. A rate of contribution (sales price less variable cost) of 75% is also considered acceptable.
Fisher has a large centralised development department which carries out all the design work before it passes the completed game to the sales and distribution department to market and distribute the product.
Fisher has developed a brand new game called Stealth and this has the following budgeted performance figures.
The selling price of Stealth will be a constant £30 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 volumes exceed 15,000 units the fixed costs will increase by 50%.
Stealth's budgeted volumes are as follows:
|
Year 1 |
Year 2 |
Year 3 |
Sales volume |
8,000 units |
16,000 units |
4,000 units |
In addition, marketing costs for Stealth will be £60,000 in year one and £40,000 in year two. Design and development costs are all incurred before the game is launched and has cost £300,000 for Stealth. These costs are written off to the income statement as incurred (ie before year 1 above).
a.)Explain the principles behind lifecycle costing and briefly state why Fisher in particular should consider these lifecycle principles.
b.)Produce the budgeted results for the game 'Stealth' and briefly assess the game's expected performance, taking into account the whole lifecycle of the game.
c.)Explain why incremental budgeting is a common method of budgeting and outline the main problems with such an approach.
d.)Discuss the extent to which a meaningful

Step by stepSolved in 5 steps with 2 images

- The Chief Operations Officer (COO) of a manufacturing firm recommends one of the manufacturing sites to undergo a process improvement initiative. He claims that this project will enable the company to realize a net savings of at least $3.25 Mln. The Chief Financial Officer (CFO) of the company tasked you to conduct a financial analysis to verify the claims of the COO. After performing cost analysis, you estimated that the project will require an initial investment of $2 Mln today and $1 Mln in Year 1. Afterwards, the initiative will yield an annual cost savings of $850k from Year 2 to Year 10. You assume that these cost savings are realized at the end of each year. (a) Suppose that you use a discount rate of 5%. Will the resulting net savings support the claim of the COO? (b) Determine the Internal Rate of Return (IRR) of the process improvement initiative. (c) Show the NPV profile of the project.arrow_forwardFAE Technologies is deciding whether it should begin production of a new toy robot. It has manufactured children’s toys before but nothing as advanced as its latest robot so historical data is at a minimum. The company believes that they can secure the materials for manufacture for between $65-85 per unit and labor costs would be between $15-25 per unit. Management’s expectations are that materials will cost $70 per unit and labor $25 per unit and that 800 units will be sold monthly. Should FAE decide to manufacture the robots in-house, maintenance of the factory machine would cost $15,000 per month. However, management has found that another alternative is for the company to outsource the labor for a flat rate of $35 per unit. The company expects to sell between 750-1000 units per month initially at a price of $149. Provide recommendations for FAE technologies that will maximize profit. Also include base, worst, and best case scenario calculations and provide a scenario summary. Be…arrow_forwardJupiter Game Company manufactures pocket electronic games. Last year Jupiter sold 25,000 games at $25 each. Total costs amounted to $525,000, of which $150,000 were considered fixed. In an attempt to improve its product, the company is considering replacing a component part that has a cost of $2.50 with a new and better part costing $4.50 per unit in the coming year. A new machine also would be needed to increase plant capacity. The machine would cost $18,000 with a useful life of six years and no salvage value. The company uses straight-line depreciation on all plant assets. (Ignore income taxes.) Jupiter Game Company manufactures pocket electronic games. Last year Jupiter sold 25,000 games at $25 each. Total costs amounted to $525,000, of which $150,000 were considered fixed. In an attempt to improve its product, the company is considering replacing a component part that has a cost of $2.50 with a new and better part costing $4.50 per unit in the coming year. A new machine also would…arrow_forward
- A bicycle manufacturer currently produces 391,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.10 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.60 per chain. The necessary machinery would cost $292,000 and would be obsolete after ten years. This investment could be depreciated to zero for tax purposes using a ten-year straight-line depreciation schedule. The plant manager estimates that the operation would require $43,000 of inventory and other working capital upfront (year 0), but argues that this sum can be ignored since it is recoverable at the end of the ten years. Expected proceeds from scrapping the machinery after ten years are $21,900. If the company pays tax at a rate of 20% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the…arrow_forwardOakmont Company has an opportunity to manufacture and sell a new product for a four-year period. After careful study, Oakmont estimated the following costs and revenues for the new product: When the project concludes in four years the working capital will be released for investment elsewhere within the company. Required: Using Excel (this will save you time and effort) answer the following: Oakmont’s cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV. Same situation as (a), but management does feel this project does possess a greater than average risk, so 19% should be the required rate of return. Compute the NPV. Management is concerned that Sales Revenues and Expenses could be rising due to inflationary factors. So the projection for year 1 is as shown, but that sales revenues will grow by 2% per year for years 2-4; and that variable expenses will grow by 4% per year for years 2-4, and that fixed out-of-pocket operating…arrow_forwardCan someone help me with part B of this problem?: Verasource Microprocessor Corporation sells 200 computer chips a month for $1,500 each. variable costs are $1,500,000. Fixed costs are $500,000. there's a defect rate of 8%. What is the hidden cost to the company of making this rate of defectives instead of 2,000 good chips each month? Suppose a six sigma effort can reduce the defects to a six sigma level. what is the impact on profitability?arrow_forward
- ABC Co is considering the launch of a new widget. If the product goes directly to the market, there is a 60% chance of success. For $500,000, the manager can conduct a focus group to increase the probability of success to 65%. Alternatively, the manager can pay a consulting firm $750,000 to research the market and refine the product. The consulting firm successfully launches new products 70% of the time. If the firm successfully launches the widget, the payoff will be $8 million. If the product is a failure, the NPV is $0. Calculate the expected NPV if the managers go directly to the market.arrow_forwardHoffman Ceramics, a division of Fielding Corporation, has an operating income of $64,000 and total assets of $400,000. The required rate of return for the company is 10%. The company is evaluating whether it should use return on investment (ROI) or residual income (RI) as a measurement of performance for its division managers. The manager of Hoffman Ceramics has the opportunity to undertake a new project that will require an investment of $100,000. This investment would earn $14,000 for the company. Read the requirements. From the standpoint of Fielding Corporation this investment is is more than Fielding's required rate of return. desirable. The ROI of the investment opportunity Requirement 4. What would the residual income (RI) be for Hoffman Ceramics if this investment opportunity were to be undertaken? Would the manager of the Hoffman Ceramics division want to make this investment if she were evaluated based on RI? Why or why not? First determine the formula to calculate the RI.…arrow_forwardDwyran Ltd. manufactures a number of different products and has recently employed Ruth Benton as its management accountant. Ruth is currently looking at the various products and processes within Dwyran Ltd. to increase profitability, as a measure to try to avoid redundancies. Ruth has identified 4 areas of that she would like to look at first and she has asked you to provide her with the following information. Dwyran Ltd. manufacture the Newborough which it sells for £40 a unit. The direct material cost is £8 per unit. Other factory costs are £60,000 each month. The bottleneck factor of the production is the assembly of the unit, which is a labour intensive process. There are 20,000 labour hours available in assembly each month. Each unit of the Newborough takes 2 hours to assemble. Calculate the Newborough’s budgeted rate per factory hour and through put ratio for the month.arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education





