A Company Has Experienced a Steady Decline in the Sale

question 14

Multiple Choice

A company has experienced a steady decline in the sale of its existing products due to unavoidable competition. It is introducing a new product to stabilize this decline in market share. In the analysis of the strategy for the new product,

• A) the lost sales should be treated as a sunk cost and not included in the analysis.
• B) the lost sales should be included along with the sales forecast for the new product.
• C) the present value of the lost sales should be included in the cashflow analysis.
• D) the sales forecast should include either the anticipated revenue from the new product or the present value of the lost sales, whichever is greater.

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Definitions:

Absorption Costing

An accounting strategy where the price of manufacturing a product is determined by adding up expenses on direct materials, direct labor, and every overhead cost, be it variable or fixed.

Markup

The extra charge applied to the acquisition cost of items intended to offset operating costs and secure a profit, which defines their market price.

Return On Investment

A performance measure used to evaluate the efficiency or profitability of an investment, calculated by dividing the net profit from the investment by its cost.

Traceable Fixed Expense

Costs that can be directly linked to a specific department, product, or segment of a business and do not change with the level of output or sales.