Relevant costs, opportunity costs. Gavin Martin, the general manager of Oregano Software, must decide when to release the new version of Oregano’s spreadsheet package, Easyspread 2.0. Development of Easyspread 2.0 is complete; however, the diskettes, compact discs, and user manuals have not yet been produced. The product can be shipped starting July 1, 2017.
The major problem is that Oregano has overstocked the previous version of its spreadsheet package, Easyspread 1.0. Martin knows that once Easyspread 2.0 is introduced, Oregano will not be able to sell any more units of Easyspread 1.0. Rather than just throwing away the inventory of Easyspread 1.0, Martin is wondering if it might be better to continue to sell Easyspread 1.0 for the next three months and introduce Easyspread 2.0 on October 1, 2017, when the inventory of Easyspread 1.0 will be sold out.
The following information is available:
Easyspread 1.0 | Easyspread 2.0 | |
Selling price | $165 | $215 |
Variable cost per unit of diskettes, compact discs, user manuals | 24 | 38 |
Development cost per unit | 60 | 95 |
Marketing and administrative cost per unit | 31 | 41 |
Total cost per unit | 115 | 174 |
Operating income per unit | $ 50 | $ 41 |
Development cost per unit for each product equals the total costs of developing the software product divided by the anticipated unit sales over the life of the product. Marketing and administrative costs are fixed costs in 2017, incurred to support all marketing and administrative activities of Oregano Software. Marketing and administrative costs are allocated to products on the basis of the budgeted revenues of each product. The preceding unit costs assume Easyspread 2.0 will be introduced on October 1, 2017.
- 1. On the basis of financial considerations alone, should Martin introduce Easyspread 2.0 on July 1, 2017, or wait until October 1, 2017? Show your calculations, clearly identifying relevant and irrelevant revenues and costs.
Required
- 2. What other factors might Gavin Martin consider in making a decision?
Want to see the full answer?
Check out a sample textbook solutionChapter 11 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
- PKPP Consultants is currently in the process of completing the systems implementation activities for converting RMCO Company’s old system to a new one. Because of unexpected Covid-19 virus and movement control order, Harry, the project manager, is concerned about finishing the project on time. The one remaining activity is testing the new computer system and subsequently eliminating the old one. Harry suggests that they can still meet their completion deadline if they use direct conversion rather than parallel conversion. Required: Assuming that you are the Chief Information System Officer (CIO) of RMCO company, how would you react to Harry’s suggestion? Discuss.arrow_forwardI know there is a Bartleby on this, but the commas are all out of place and I'm still confused. Could you give a more in-depth solution and explain on how to calcultae FCF, specifically with excel functions? We are entering the widget business. It costs $500,000, payable in year 1, to develop a prototype. This cost can be depreciated on a straight-line basis during years 1-5. Each widget sells for $40 and incurs a variable cost of $20. During year 1 the market size is 100,000, and the market size is growing at 10% per year. Profits are taxed at 40%, but there are no taxes on negative profits. a) Given our other assumptions, what market share (in %) is needed to ensure the total free cash flow (FCF) of $0 over the five year period? Note: FCF during a year equals after-tax profits plus depreciation minus fixed costs (if any).b) Describe how an increase in percent market growth rate changes total FCF over years 1-5.c) Describe how simultaneous changes in percent market share and changes…arrow_forwardYou are considering adding a new software title to those published by your highly successful software company. If you add the new product, it will use capacity on your disk duplicating machines that you had planned on using for your flagship product, “Battlin’ Bobby.” You had planned on using the unused capacity to start selling “BB” on the West coast in two years. You would eventually have had to purchase additional duplicating machines 10 years from today, but using the capacity for your new product will require moving this purchase up to 2 years from today. If the new machines will cost $113,000 and can be expensed under Section 179, your marginal tax rate is 21 percent, and your cost of capital is 14 percent, what is the opportunity cost associated with using the unused capacity for the new product? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)arrow_forward
- You are considering adding a new software title to those published by your highly successful software company. If you add the new product, it will use capacity on your disk duplicating machines that you had planned on using for your flagship product, “Battlin’ Bobby.” You had planned on using the unused capacity to start selling “BB” on the west coast in two years. You would eventually have had to purchase additional duplicating machines 10 years from today, but using the capacity for your new product will require moving this purchase up to two years from today. If the new machines will cost $101,000 and can be expensed under section 179, your marginal tax rate is 21 percent, and your cost of capital is 10 percent, what is the opportunity cost associated with using the unused capacity for the new product?arrow_forwardRUE BENNETT Company develops software for small businesses and household computers. The majority of the company's computer programmers are working on developing software that will perform relatively specialized functions in a user-friendly manner. Before the working model is released to production for the preparation of masters and additional testing, it undergoes extensive testing. As a result of this meticulous planning, various computer software packages have been developed that have proven to be very successful in the industry. RUE BENNETT Company incurred the following costs during 2020: Cost to reproduce and prepare software for sale 200,002 Amortization of capitalized software development costs from current and prior years 94,321 Expenses related to projects after technological feasibility has been established but before software is available for commercial production 151,323 Salaries and wages of programmers doing research 910,000 Expenses related…arrow_forwardPix Paper Inc. produces photographic paper for printing digital images. One of the processes for this operation is a coating (solvent spreading) operation, where chemicals are coated onto paper stock. There has been some concern about the cost performance of this operation. As a result, you have begun an investigation. You first discover that all materials and conversion prices have been stable for the last six months. Thus, increasesin prices for inputs are not an explanation for increasing costs. However, you have discovered three possible problems from some of the operating personnel whose quotes follow:Operator 1: “I’ve been keeping an eye on my operating room instruments. I feel as though our energy consumption is becoming less efficient.”Operator 2: “Every time the coating machine goes down, we produce waste on shutdown and subsequent startup. It seems as though during the last half year, we have had more unscheduled machine shutdowns than in the past. Thus, I think our yields…arrow_forward
- A large brokerage company is assessing the introduction of a new computer system to improve routing and execution of customer orders. The managing director wants to install a new Smart Routing system, whereas another director prefers the Direct Routing system. Each machine provides the same order-execution ability and can satisfy the broker’s obligation to give investors the best possible order execution. The initial cost of each system is $170,000, but because of differing software, maintenance, and processing requirements, estimates of the after-tax costs of operation differ. These are as follows: Period Smart Routing Direct Routing 1 39,000 56,000 2 48,000 61,000 3 48,000 61,000 4…arrow_forwardLate in 2021, a “bug” was discovered in a software product that was installed for several of your company's clients. Although the bug was not your company's fault, the CEO of the company feels strongly that company software engineers should assist the clients with a programming solution since the company recommended the software. Clients will be contacted early in 2022 and should have fixes in place for all those affected by the end of the first quarter of 2022. The estimated cost is $7,000. Prepare end of year adjusting entries, corrections, and any other necessary entries necessary to prepare accurate financial statements for 2021.arrow_forwardHudson Corporation is considering three options for managing its data warehouse: continuing with its own staff, hiring an outside vendor to do the managing, or using a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows: If the demand probabilities are 0.2, 0.5, and 0.3, which decision alternative will minimize the expected cost of the data warehouse? What is the expected annual cost associated with that recommendation? Construct a risk profile for the optimal decision in part (a). What is the probability of the cost exceeding $700,000?arrow_forward
- Refer to the information for Smooth Move Company on the previous page. Suppose a customerwants to have its company logo affixed to each paperweight using a label. Smooth Move wouldhave to purchase a special logo labeling machine that will cost $12,000. The machine will be ableto label the 15,000 units and then it will be scrapped (with no further value). No other fixedoverhead activities will be incurred. In addition, each special logo requires additional direct materials of $0.20.Required:CONCEPTUAL CONNECTION Should Smooth Move accept the special order? By how muchwill profit increase or decrease if the order is accepted?arrow_forwardour highly successful software company is considering adding a new software title to your list. If you add the new product, it will use the full capacity of your disk duplicating machines that you had planned on using for your flagship product, “Battlin’ Bobby.” You had previously planned on using the unused capacity to start selling “BB” on the West Coast in two years. Eventually, you would have had to purchase additional duplicating machines 10 years from today, but since your new product will use up the extra capacity, this will require moving this purchase up to 2 years from today. If the new machines will cost $101,000 and can be expensed under Section 179, your marginal tax rate is 21 percent, and your cost of capital is 10 percent, what is the opportunity cost associated with using the unused capacity for the new product? Do not round intermediate calculations. Round your answer to 2 decimal placesarrow_forwardA property title search firm is contemplating using online software to increase its search productivity. Currently an average of 40 minutes is needed to do a title search. The researcher cost is $2 per minute. Clients are charged a fee of $400. Company A's software would reduce the average search time by 10 minutes, at a cost of $3.50 per search. Company B's software would reduce the average search time by 12 minutes at a cost of $3.60 per search. a. Calculate the productivity in terms of revenue per dollar of input. (Round your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your response.) Productivity (Revenue per Dollar Input) $ Approach Current Company A Company B $ b. Which option would have the highest productivity in terms of revenue per dollar of input? Company A Company B Currentarrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningEssentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning