Life-cycle product costing, product emphasis. (0-40 minutes)

Decision Support Systems (DSS) is examining the profitability and pricing policies of its software division. The DSS software division develops software packages for engineers. DSS has collected data on three of its more recent packages:

@ EE-46: package for electrical engineers

@® ME-83: package for mechanical engineers

® {!E17:package for industrial engineers Summary details on each package over their 2-year ‘cradle-to-grave’

product lives are as follows: nu52

REQUIRED 1. How does a product life-cycle income statement differ from an income statement that is calendar-based? What are the benefits of using a product lifecycle reporting format?
2. Present a product life-cycle income statement for each software package.
Which package is the most profitable,and which is the least profitable?
3. How do the three software packages differ in their cost structure (the percentage of total costs in each cost category)?

Transcribed Image Text:

SELLING NUMBER OF UNITS SOLD PACKAGE EE-46 ME-83 IE-17 PRICE YEAR 1 EUR 250 2,000 2,000 5,000 300 200 Assume that no stock remains on hand at the end of year 2. YEAR 2 8,000 3,000 3,000 DSS is deciding which product lines to emphasise in its software division. In the past 2 years, the profitability of this division has been mediocre. DSS is particularly concerned with the increase in R&D costs in several of its divi- sions. An analyst at the software division pointed out that for one of its most recent packages (IE-17), major efforts had been made to cut back R&D costs. Last week Kari Pystynen, the software division manager, attended a seminar on product life-cycle management. The topic of life-cycle reporting was discussed. Pystynen decides to use this approach in her own division. She collects the following life-cycle revenue and cost infor- mation for the EE-46, ME-83 and IE-17 packages: EE-46 ME-83 YEAR 1 YEAR 2 YEAR 1 YEAR 2 IE-17 YEAR 1 YEAR 2 Revenues EUR 500,000 EUR 2,000,000 EUR 600,000 EUR 900,000 EUR 1,000,000 EUR 600,000 Costs R&D 700,000 0 450,000 0 240,000 0 Design of product 185,000 15,000 110,000 10,000 80,000 16,000 Manufacturing 75,000 225,000 105,000 105,000 143,000 65,000 Marketing 140,000 360,000 120,000 150,000 240,000 208,000 Distribution 15,000 60,000 24,000 36,000 60,000 36,000 Customer service 50,000 325,000 45,000 105,000 220,000 388.000