Chad, Chairman of BBB Industries, had just finished examining a projected profit summary for two components that will be used in LCD Screens. Both units were still in a very preliminary planning stage, and a decision had to be made regarding their continued viability. The components would be developed, produced, and sold at the same time. Each product's life cycle is 40 months. The projected profit performance of the two items promised a return on sales of 10 percentless than the 14 percent rate set by company standards. From the statements below, it appeared to David that the culprit was Component 402 because its gross profit percentage was much lower than that of Component 401.

401 402 Total

Sales $500,000 $500,000 $1,000,000

Cost of goods sold 250,000 350,000 600,000

Gross profit $250,000 $150,000 $ 400,000

Research and development (230,000)

Selling expenses (70,000)

Profit before taxes $ 100,000

Required:

a. Explain why Chad may be wrong in his assessment of the relative performances of the two products. What change in the company's life-cycle budgeting approach would you suggest?

b. Suppose that 75 percent of the research and development and 75 percent of the selling expenses are traceable to Component 401. Prepare budgeted life-cycle income statements for each product and calculate the return on sales. What does this tell you about the importance of accurate life-cycle budgeting?