Problem:
Chris Johnson is the CFO of RNT, a manufacturer of parts and supplies for the cable TV industry. Chris has developed an analysis of the profitability of the firm's two main product lines, cable hardware, and cable supplies. Based on the analysis, he concludes that cable hardware is the most profitable of the firm's product lines.
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Hardware
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Supplies
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Total
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Sales
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$4,000,000
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$3,000,000
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$7,000,000
|
|
Cost of goods sold
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(2,300,000)
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(1,900,000)
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(4,200,000)
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|
Gross profit
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$1,700,000
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$1,100,000
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$2,800,000
|
|
Research and development
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|
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(1,200,000)
|
|
Selling expenses
|
|
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( 600,000)
|
|
Profit before taxes
|
|
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$ 1,000,000
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Required:
(Q1) Explain why Chris may be wrong in her assessment of the relative performances of the two product lines.
(Q2) Suppose that 80 percent of the R & D and selling expenses are traceable to Hardware line. Prepare life-cycle income statements for each product and calculate the return on sales. What does this tell you about the importance of accurate life-cycle costing?