8 638 2. (9 marks in total) Sagat Co, a watch producer, released a new product for teenagers - LCD watch. The product is projected to have 2 years life cycle following a release of an upgraded version of LCD watch. Sagat Co plans to use life cycle costing for total production cost and profit calculation purposes. Product development costs total $2MM and the company gave up the opportunity to earn $950,000 contribution from another product sale. Sagat Co owns a 5-year patent for the technology, but it must be renewed on an annual basis with associated renewal costs of $50,000. The costs of the patent were $200,000. Below projections are related to the LCD watch production Sales volumes (units) 2020 350.000 2021 560,000 Seling price per un Material cost per unit Labour cost per unit Fixed production overheads Selling and distribution costs Environmental costs $ 50 19 10 1.8 0.7 0.2 $ 45 16 8 20 0.8 0.18 Sagat Co does not have a foced marketing contract so there are some doubts associated with advertising campaign costs. Below probabilities and range of costs are retrieved from open market sources: Probability Probability Year 1 Expected cost (Sm) 2.5 3,0 3,5 0,3 0,4 0,3 Year 2 Expected cost (5m) 1,5 2.5 3.5 0.2 0,5 0,3 (0) (11) Required: Using life cycle costing method, calculate the total expected profit for 2020 and 2021 (5 marks): Using the target costing methodology briefly describe practical ways to close the target cost gap (2 marks): Explain how activity-based costing methodology may implemented to account for the environmental costs of the business (2 marks). (iii) END OF PAPER