Thomas Jack, the COO of CryoDerm, has asked his cost management team for a product-line profitability analysis for his firm's two products, Zderm and Bderm. The two skin care products require a large amount of research and development and advertising. After receiving the following statement from CryoDerm's costing team, Jim concludes that Zderm is the more profitable product and that perhaps cost-cutting measures should be applied to Bderm.

Zderm BdermTotal

Sales $3,000,000 $2,000,000 $5,000,000

Cost of Goods Sold ($1,900,000) ($1,600,000) ($3,500,000)

Gross Profit $1,100,000 $ 400,000 $1,500,000

R&D (900,000)

Selling expenses (100,000)

Profit before taxes $ 500,000

Required:

(i) Briefly explain why Jim may be wrong in his assessment of the relative performance of the two products.

(ii) Suppose that 80% of the R&D and selling expenses are traceable to Zderm. Prepare life-cycle income statements for each product. What does this indicate about the importance of accurate life-cycle costing?

(iii) Consider the following additional information - R&D and selling expenses are substantially higher for Zderm because it is a new product. Jim has strongly supported development of the new product, including the high selling and R&D expenses. He has assured the Board of Directors that the Zderm investment will pay off in improved profits for the firm. Discuss the ethical issues, if any, facing Jim as he reports to top management on the profitability of the firm's two products.