Question 2 managing costing Abm and life cycle costing

Padma skin care limited produces environmentally friendly skin care products for its local and international market. The design department is currently working on two potential product lines, nature glow and daily shine. Both product lines are estimated to have a life cycle of three years one year of deseign and development and two years on retail market. The marketing department is keen to introduce both, as they complement to each other however the company may not have enough capacity to produce both. The company accountant reviewed the budget estimates for both of the product lines and estimated their profitability for each year in the retail market as follows.

	Nature glow	Daily shine	total
Sales	$2175000	$1500000	$3675000
Cost of good sold	$(1500000)	$(1125000)	$(2625000)
Gross margin	$675000	375000	$1050000

After receiving the profitability statement from the companys accountant kate, taylor, the marketing manager of the company, comments that nature glow is the more profitable product and that perhaps cost-cutting measures should be applied to daily shine. However the company accountant is concerned about some of the other cost in year 1 are $1200000 and the total selling expense are $200000 per year for the year 2 and 3. Moreover he has pointed out that both design and development and selling expenses are substantially higher of nature glow because it is relatively a new product. Kate has strongly supported development of the new product including the high selling and design and development expenses. She has assured senior managers that the nature glow investment will payoff in improved profits for the firm.

Question discuss the importance and limitation of developing life cycle budgets for the new products. Explain why kate may be wrong in her assessment of the relative performance of the two products.?

Question 2.2 suppose that 75% of the design and development (dandD) costs and selling expense are traceable to nature glow. Using this assumption, compute the life-cycle income for each product and the return sales for each product. Do you support kates;s decision? Explain

	Nature glow	Daily shine	Total
Total life cycle profit (loss)
Return on sales(%)

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