Great Products Ltd has a range of products which are in regular demand but needs to introduce new products from time to time to maintain profitability. The following shows the forecast Income statement for the next 6 years before introducing new products.
Great Products Ltd Forecast Income statement
|
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
|
|
£M |
£M |
£M |
£M |
£M |
£M |
|
|
Sales |
400 |
380 |
360 |
300 |
250 |
200 |
|
Cost of sales |
200 |
190 |
180 |
150 |
125 |
100 |
|
Contribution |
200 |
190 |
180 |
150 |
125 |
100 |
|
Marketing |
8 |
9 |
8 |
6 |
4 |
4 |
|
Fixed expenses |
80 |
70 |
60 |
60 |
60 |
60 |
|
Net Income |
112 |
111 |
112 |
84 |
61 |
36 |
The company has an active Research and Development department and has one product ready for launch (The Maxilla) in 2022 and another (The Fantosa) being prepared for launch in 2024.
Each successful product is allocated a share of the Development budget. Disposal costs are charged in the year of disposal.
The products have the following estimates
|
Maxilla |
Fantosa |
|
|
Allocated R & D |
£70 Million |
£20M |
|
Estimated sales price per unit |
||
|
2022 |
£80 |
|
|
2023 |
£65 |
|
|
2024 |
£55 |
£60 |
|
2025 |
£40 |
£50 |
|
2026 |
£50 |
|
|
2027 |
£45 |
|
|
Estimated variable costs |
£30 per unit |
£15 per unit |
|
Marketing |
2% of sales value |
2% of sales value |
|
Estimated unit sales 2022 |
800,000 units |
|
|
2023 |
1,200,000 units |
|
|
2024 |
600,000 units |
|
|
2025 |
300,000 units |
|
|
Disposal costs end of year 2025 |
200,000 |
No disposal costs |
The lifecycle revenue less costs is expected to provide at least 10% return on sales taking the sales of the life cycle as a whole.
a) Define lifecycle costing and explain how the information provided by the method is used. (4 marks)
b i) Show the lifecycle of the Maxilla product and comment on your calculations. (5 marks)
ii) Show the net income for each year assuming that the Maxilla product goes ahead
(you are not required to show all the changes in each line item).
c i) Assuming that Fantosa has a four-year life and Great Products Ltd wishes to maintain the same profit as the year 2022 with the Maxilla product going ahead.
Using the information in the table above, show the level of sales units which Fantosa must achieve in each specific year to meet the target. (5 marks)
ii) Comment on your calculations in part c i) and advise Great Products Ltd concerning their future product developments
