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Question Coldarin designs, develops and sells PC games. Games have a short lifecycle lasting around 3 years only. Performance of the games is measured by

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Coldarin designs, develops and sells PC games. Games have a short lifecycle lasting around 3 years only. Performance of the games is measured by reference to the profits made in each of the expected three years of popularity. Coldarin accepts a net profit of 25% of turnover as reasonable. A rate of contribution of 75% is also considered acceptable.

Coldarin has a large centralised development department which carries out all the design work before it passes the completed games to the sales and distribution department to market and distribute the product.

Coldarin has developed a brand-new game called PCD and this has the following budgeted performance figures.

The selling price of PCD will be a constant 50 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 volume exceed 15,000 units the fixed costs will increase by 50%.

PCD's budgeted volumes are as follows:

Year 1 Year 2 Year 3

Sales volume 7,500 units 16,800 units 4,200 units

In addition, marketing costs for PCD will be 80,000 in year one and 50,000 in year two. Design and development costs are all incurred before the game is launched and has a cost of 400,000 for PCD. These costs are written off to the income statement as incurred (i.e. before year 1 above).

Requirement: Produce the budgeted results for PCD and briefly assess the game's expected performance, taking into account the whole lifecycle of the game.

Solution:

I have done solution but I need someone to help me for analysis in words:

Analysis:

Refer to my calculations in Appendix 1

Year 1:

Budgeted profit 47%. Target profit 25%.

Budgeted profit 47% > Target profit 25%

Refer to my calculation in Appendix 1(WN3), budgeted profit 47% is higher than target profit of 25%. So, in year 1, Coldarin has done good.

I need analysis year1 more in words with details above

Year 2:

Budgeted profit 70%. Target profit 25%.

Budgeted profit 70% > Target profit 25%

Refer to my calculation in Appendix 1(WN3), budgeted profit 70% is higher than target profit of 25%. Thus, in year 2, Coldarin did well.

I need analysis year2 more in words with details above

Year 3:

Budgeted profit 52%. Target profit 25%.

Budgeted profit 52% > Target profit 25%

Refer to my calculation in Appendix 1(WN3), budgeted profit 52% is higher than target profit of 25%. So, Coldarin did well in year 3.

I need analysis year3 more in words with details above

Overall:

Budgeted profit 61%. Target profit 25%.

Budgeted profit 61% > Target profit 25%

Refer to my calculation in Appendix 1(WN3), budgeted profit 61% is higher than target profit of 25%. So, Coldarin has performed well overall.

Business, however, has decided not to include a 400,000 development cost. It would be more appropriate to include 400,000 rather than write it off, as it is a lifecycle expense. Therefore, if they add 400,000, 472,500(872,500-400,000) would be the overall lifecycle costing the profit, which is far smaller than the initial 872,500 profit.

I need analysis overall total 3 years more in words with details above

Appendix 1

According to question:

Target profit 25%

I have calculated budgeted profit % in below:

I did not include here total revenue and profit calculation.

(WN3) Calculation of budgeted profit %

Budgeted profit % = (Net profit / Revenue) 100

Year 1 : (177,500/375,000) 100 = 47%

Year 2: (586,000/840,000) 100=70%

Year 3: (109,000/210,000) 100=52%

Total: (872,500/1425,000) 100=61%

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