QUESTION 3 (25 marks) Budgeting and Lifecycle Costing Nintendo designs, develops and sells many television games. Games have a short lifecycle lasting around three years. Performance of the games is measured by reference to the profits made in each of the expected three years of popularity. Nintendo accepts a net profit of 35% of turnover as reasonable. A rate of contribution (sales - variable cost) of 75% is also considered acceptable. Nintendo has a large centralized 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. Nintendo has developed a brand-new game called Mario Bros. and this has the following budgeted performance figures. The selling price of Mario Bros. 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 the volumes exceed 15,000 units, the costs will increase by 50%. Mario Bros.' budget is as follows: Sales volume Year 1 8,000 units Year 2 16,000 units Year 3 4,000 units Additionally, marketing costs for Mario Bros. 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 Mario Bros. these costs are written off to the income statement as they are incurred (i.e. before year 1 above). Required: (a) Explain the principles behind life cycle costing and briefly state why Nintendo should consider these lifecycle principles. (3 marks) (b) Produce the budgeted results for the game 'Mario Bros.' and briefly assess the game's expected performance, considering the whole lifecycle of the game. (12 marks) (c) Explain two reasons why incremental budgeting is a common method of budgeting and outline three main problems with such approach. (5 marks) (d) Discuss the five stages of a product lifecycle. (5 marks)

QUESTION 3 - (25 marks) Budgeting and Lifecyele Costing Nintendo designs, develops and sells many television games. Games have a short lifecycle lasting around three yeurs. Performance of the games is measured by reference to the profits made in each of the expected three years of popularity. Nintendo accepts a net profit of 35% of tumover as reasonable. A rate of contribution (sales - variable cost) of 75% is also considered acceptable. Nintendo has a large centralized 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 prodoct. Nintendo has developed a brand-new game called Mario Bros. and this has the following budgeted performance figures. The selling price of Mario Bros. will be a constant $30 per garne. 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 the volumes exceed 15,000 units, the costs will increase by 50%. Mario Bros. ' budget is as follows: \begin{tabular}{llll} & Year 1 & Year 2 & Year 3 \\ Sales volume & 8,000 units & 16,000 units & 4,000 units \end{tabular} Additionally, marketing costs for Mario Bros. 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 Mario Bros. these costs are written off to the income statement as they are incurred (i.e. before year 1 above). Required: (a) Explain the principles behind life cycle costing and briefly state why Nintendo should consider these lifecycle principles. (3 marks) (b) Produce the budgeted results for the game 'Mario Bros.' and briefly assess the game's expected performance, considering the whole lifecycle of the game. (12 marks) (c) Explain two reasons why incremental budgeting is a common method of budgeting and outline three main problems with such approach. ( 5 marks) (d) Discuss the five stages of a product lifecycle