Ignore the time value of money.Arnold is concerned about the operating income it will report in the first sales phase. It is considering pricing the vacuum sweeper at $450 for the first 6 months and decreasing the price to $400 thereafter. With this pricing strategy, Arnold expects to sell 10,000 units instead of 12,000 units in the first 6 months, and the same number of units for the remaining life cycle. Assuming the same cost structure given in the problem, which pricing strategy would you recommend? Explain. Life-cycle budgeting and costing. Arnold Manufacturing, Inc., plans to develop a new industrial-powered vacuum cleaner for household use that runs exclusively on rechargeable batteries. The productwill take 6 months to design and test. The company expects the vacuum sweeper to sell 12,000 units duringthe first 6 months of sales; 24,000 units per year over the following 2 years; and 10,000 units over the final 6months of the product's life cycle. The company expects the following costs:Total Fixed Costfor the PeriodVariable CostPeriodper UnitCostDesign costsMonths 0-6$600,000$1,600,000$1,200,000$250,000$6,000,000$2,800,000$800,000$1,000,000$550,000$150,000Months 7-12Production$100 per unitMarketing$ 12 per unit$ 80 per unitDistributionMonths 13-36ProductionMarketing$ 10 per unit$ 75 per unitDistributionMonths 37-42ProductionMarketingDistribution$ 9 per unit

Operating income: Income statement reports revenues and expenses from business operations, and the…

Answered: Life-cycle budgeting and costing.…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Ignore the time value of money.

Arnold is concerned about the operating income it will report in the first sales phase. It is considering pricing the vacuum sweeper at $450 for the first 6 months and decreasing the price to $400 thereafter. With this pricing strategy, Arnold expects to sell 10,000 units instead of 12,000 units in the first 6 months, and the same number of units for the remaining life cycle. Assuming the same cost structure given in the problem, which pricing strategy would you recommend? Explain.

Life-cycle budgeting and costing. Arnold Manufacturing, Inc., plans to develop a new industrial-
powered vacuum cleaner for household use that runs exclusively on rechargeable batteries. The product
will take 6 months to design and test. The company expects the vacuum sweeper to sell 12,000 units during
the first 6 months of sales; 24,000 units per year over the following 2 years; and 10,000 units over the final 6
months of the product's life cycle. The company expects the following costs:
Total Fixed Cost
for the Period
Variable Cost
Period
per Unit
Cost
Design costs
Months 0-6
$600,000
$1,600,000
$1,200,000
$250,000
$6,000,000
$2,800,000
$800,000
$1,000,000
$550,000
$150,000
Months 7-12
Production
$100 per unit
Marketing
$ 12 per unit
$ 80 per unit
Distribution
Months 13-36
Production
Marketing
$ 10 per unit
$ 75 per unit
Distribution
Months 37-42
Production
Marketing
Distribution
$ 9 per unit

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