Answered: Explain the principles behind lifecycle…

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE

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a) Explain the principles behind lifecycle costing and briefly state why Fisher in particular should consider these lifecycle principles.

b) Produce the budgeted results for the game 'Stealth' and briefly assess the game's expected performance, taking into account the whole lifecycle of the game.

c) Explain why incremental budgeting is a common method of budgeting and outline the main problems with such an approach.

d) Discuss the extent to which a meaningful standard cost can be set for games produced by Fisher. You should consider each of the cost classifications mentioned above.

Transcribed Image Text:Fisher designs, develops and sells many PC games. Games have a short lifecycle lasting around three years only. Perfomance of the games is measured by reference to the profits made in each of the expected three years of popularity. Fisher accepts a net profit of 35% of tumover as reasonable. A rate of contribution (sales price less variable cost) of 75% is also considered acceptable. Fisher has a large centralised development department which caries out all the design work before it passes the completed game to the sales and distribution department to market and distribute the product Fisher has developed a brand new game called Stealth and this has the following budgeted performance figures. The selling price of Stealth will be a constant £30 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 volumes exceed 15,000 units the fixed costs will increase by 50%. Stealth's budgeted volumes are as follows: Year 2 16,000 units Year 3 Year 1 Sales volume 8,000 units 4,000 units In addition, marketing costs for Stealth will be £60,000 in year one and £40,000 in year two. Design and development costs are all incurred before the game is launched and has cost £300,000 for Stealth. These costs are written off to the income statement as incurred (ie before year 1 above).

Definition Definition System of assigning an estimated cost to the product (instead of the actual cost) so that the product cost can be determined well in advance and the pricing of the product can be done on time. Since the actual cost cannot be predicted at the initial stage of the production process, the estimated cost is recorded in the books. Any deviation of the estimated cost of the actual cost is adjusted in the books at the end of the period.

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