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 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:

Application of lifecycle costing to Coldarin:

Solution: I have done solution below. But I am not 100% satisfied with it. Can anyone who is really good in analysis help me for improvement:

Due to the nature of their business, lifecycle costing is important to Coldarin. PC games are being produced and most of the costs will be incurred prior to the production of the game. Since the idea is all about creating it. As per product lifecycle, we have different stages such as pre-introduction, introduction, development, maturity and decline, and most of the cost will be incurred pre-introduction stage due of the nature of Coldarin's Business. If you do not include all those expenses, the true representation of the profit of these PC games will not be provided. For example, in coldarin company has written off 400,000 design and development cost from income statement. As a result, it will not give the true reflection of the profits of this PC games. Moreover, if the resource is used, invested costs may be borne in the future as a result of decisions. For example, if the company committed to pay 50,000 for advertisement, even though advertising services are cheaper in the current market, it still has to pay it (Garrett, 2021).

As far as the lifecycle of the question is concerned, that implies that in around 3 years you have to recover all your costs. You have a lot of time to recover it if you have a long lifecycle with no complications, but it is only 3 years for Coldarin. You have to make sure that in those 3 years, you have to recover all of your costs. In order to do it within a short period of time, Coldarin requires daily attention on assessing all cost. For example, taking into account the use of unskilled labour instead of skilled labour at certain stages of production can save labour costs or raise training costs may minimize the cost of warranty claims that could arise as a result of game manufacturing errors (Garrett, 2021)