The Algonquin Company Developed the Following Budgeted Life-Cycle Income Statement

question 38

Multiple Choice

The Algonquin Company developed the following budgeted life-cycle income statement for two proposed products. Each product's life cycle is expected to be two years. $\begin{array}{lrrr}&\text { Product A } & \text { Product B } & \text { Total }\\\text { Sales } & \$ 280,000 & \$ 200,000 & \$ 480,000 \\\text { Cost of goods sold } & 200,000 & 130,000 & 330,000 \\\text { Gross profit } & \$ 80,000 & \$ 70,000 & \$ 150,000\\\text { Period expenses: }\\\ \text {Research and development }&&&(70,000) \\ \text {Marketing }&&&(50,000) \\ \text { Life-cycle income}&&&\$30,000\\\end{array}$
A 10 percent return on sales is required for new products. Because the proposed products did not have a 10 percent return on sales, the products were going to be dropped.
Relative to Product B, Product A requires more research and development costs but fewer resources to market the product. Sixty percent of the research and development costs are traceable to Product A, and 30 percent of the marketing costs are traceable to Product A.
Return on sales for Product A would be

• A)40.0%.
• B)25.0%.
• C)8.2%.
• D)2.5%.

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