Exercise 12.25 (Horngren, Foster and Datar, 2002) Destin products makes digital watches. Destin is preparing a product life-cycle budget for a new watch, MX3. Development on the new watch is to start shortly. Estimates for the MX3 are as follows: Life-cycle units manufactured and sold 400,000 Selling price per watch $40 Life-cycle costs R&D and design costs Manufacturing Variable cost per watch Variable cost per batch $1,000,000 $15 $600 Watches per batch 500 Fixed costs $1,800,000 Marketing Variable cost per watch $3.20 Fixed costs $1,000,000 Distribution Variable cost per batch $280 Watches per batch 160 Fixed costs $720,000 Customer-service cost per watch $1.50 Ignore the time value of money REQUIRED 1. Calculate the budgeted life-cycle operating income for the new watch. 2. What percentage of the budgeted total product life-cycle costs will be incurred by the end of the R&D and design stages? 3. Destin's Market Research Department estimates that reducing MX3's price by $3 will increase life-cycle unit sales by 10%. If unit sales increase by 10%, Destin plans to increase manufacturing and distribution batch sizes by 10% as well. Assume that all variable costs per watch, variable costs per batch, and fixed costs will remain the same. Should Destin reduce MX3's price by $3? Show your calculations.
Exercise 12.25 (Horngren, Foster and Datar, 2002) Destin products makes digital watches. Destin is preparing a product life-cycle budget for a new watch, MX3. Development on the new watch is to start shortly. Estimates for the MX3 are as follows: Life-cycle units manufactured and sold 400,000 Selling price per watch $40 Life-cycle costs R&D and design costs Manufacturing Variable cost per watch Variable cost per batch $1,000,000 $15 $600 Watches per batch 500 Fixed costs $1,800,000 Marketing Variable cost per watch $3.20 Fixed costs $1,000,000 Distribution Variable cost per batch $280 Watches per batch 160 Fixed costs $720,000 Customer-service cost per watch $1.50 Ignore the time value of money REQUIRED 1. Calculate the budgeted life-cycle operating income for the new watch. 2. What percentage of the budgeted total product life-cycle costs will be incurred by the end of the R&D and design stages? 3. Destin's Market Research Department estimates that reducing MX3's price by $3 will increase life-cycle unit sales by 10%. If unit sales increase by 10%, Destin plans to increase manufacturing and distribution batch sizes by 10% as well. Assume that all variable costs per watch, variable costs per batch, and fixed costs will remain the same. Should Destin reduce MX3's price by $3? Show your calculations.
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 19P
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Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
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Transcribed Image Text:Exercise 12.25 (Horngren, Foster and Datar, 2002)
Destin products makes digital watches. Destin is preparing a product life-cycle budget for a
new watch, MX3. Development on the new watch is to start shortly. Estimates for the MX3
are as follows:
Life-cycle units manufactured and sold
Selling price per watch
400,000
$40
Life-cycle costs
$1,000,000
R&D and design costs
Manufacturing
Variable cost per watch
$15
Variable cost per batch
$600
Watches per batch
500
Fixed costs
$1,800,000
Marketing
Variable cost per watch
$3.20
Fixed costs
$1,000,000
Distribution
Variable cost per batch
$280
Watches per batch
160
Fixed costs
$720,000
$1.50
Customer-service cost per watch
Ignore the time value of money
REQUIRED
1. Calculate the budgeted life-cycle operating income for the new watch.
2. What percentage of the budgeted total product life-cycle costs will be incurred by the end
of the R&D and design stages?
3. Destin's Market Research Department estimates that reducing MX3's price by $3 will
increase life-cycle unit sales by 10%. If unit sales increase by 10%, Destin plans to
increase manufacturing and distribution batch sizes by 10% as well.
Assume that all variable costs per watch, variable costs per batch, and fixed costs will
remain the same. Should Destin reduce MX3's price by $3? Show your calculations.
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