3. (TCO 7) Mercy Greeting Cards Incorporated is starting a new business venture

ID: 2361906 • Letter: 3

Question

(TCO 7) Mercy Greeting Cards Incorporated is starting a new business venture and is in the process of evaluating its product lines. Information for one new product, traditional parchment grade cards, is as follows:

?For 16 times each year, a new card design will be put into production. Each new design will require$100 in setup costs.

? The parchment grade card product line incurred $75,000 in development costs and is expected to be produced over the next four years.

? Direct costs of producing the designs average $0.50 each.

? Indirect manufacturing costs are estimated at $50,000 per year.

? Customer service expenses average $0.10 per card.

? Current sales are expected to be 2,500 units of each card design. Each card sells for $3.50.

? Sales units equal production units each year.

What is the total estimated life-cycle operating income

Explanation / Answer

Total No of Cards Sold

16 design X 2,500 cards X 4 Years

= 160,000 cards

($)

Total Estimated Lifecycle Sales

160,000 cards X $3.50

560,000

Less : Total Lifecycle Cost

Development Cost

(75,000)

Setup Cost

16 Design X $600 X 4 Years

(38,400)

Direct Production Cost

$0.50 X 160,000 cards

(80,000)

Indirect Manufacturing Cost

$50,000 X 4 Years

(200,000)

Customer Service Expense

$0.10 X 160,000 cards

(16,000)

Total Estimated Lifecycle Cost

(409,400)

Estimated life-cycle Profit

150,600