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Question 2: Managing costs: ABM and Life-cycle costing [25 marks] 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 design and development and two years on the retail market. The marketing department is keen to introduce both, as they may 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: Total Sales Cost of goods sold Gross margin Nature Glow Daily Shine $2,175,000 $1,500,000 $(1,500,000) $(1,125,000) $675,000 $375,000 $3,675,000 $(2,625,000) $1,050,000 After receiving the profitability statement from the company's 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 costs he has unco For both products, has figured out that the total design and development costs in year 1 are $1,200,000 and the total selling expenses are $200,000 per year for the year 2 and 3. Moreover, he has pointed out that both the design and development and selling expenses are substantially higher for 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 pay off in improved profits for the firm Required: Question 2.1 Discuss the importance and limitations 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. (8 marks) [Word limit: 250 words. Note the word count at the end of your answer] Your Answer (expand the space as required): Question 2.2 Suppose that 75% of the design & development (D&D) costs and selling expenses are traceable to Natur Glow. Using this assumption, compute the life-cycle income for each product and the return on sales for each product. Do you support Kate's decision? Explain. (10 marks) Total [Word limit for later part: 150 words. Note the word count at the end of your answer] Your Answer: Nature Glow Daily Shine Total life-cycle profit(loss) Return on sales (%) Show your workings here (expand the space as required): Question 2.3 What other information that the company might need to undertake a complete profitability analysis of two products? Discuss. [Word limit: 250 words. Note the word count at the end of your answer] Your Answer (expand the space as required): (7 marks)