City Co designs, develops and sells many PC games. Games have a short lifecycle lasting around three years only. Performance of the games is measured by reference to the profits made in each of the expected three years of popularity. City Co accepts a net profit of 35% of turnover as reasonable. A rate of contribution (sales price less variable cost) of 75% is also considered acceptable.
City Co has a large, centralised development department which carries out all the design work before it passes the completed game to the sales and distribution department to market and distribute the product.
City Co has developed a brand new game called Kezo and this has the following budgeted performance figures.
The selling price of Kezo will be a constant $30 per game. Analysis of the costs show that at a volume of 10,000 units a total cost of $130,000 is expected. However, at a volume of 14,000 units a total cost of $150,000 is expected. If volumes exceed 15,000 units, the fixed costs will increase by 50%.
Kezo’s budgeted volumes are as follows:
Year 1 Year 2 Year 3
Sales volume 8,000 units 16,000 units 4,000 units
In addition, marketing costs for Kezo will be $60,000 in year one and $40,000 in year two. Design and development costs are all incurred before the game is launched and has cost $300,000 for Kezo. These costs are written off to the income statement as incurred (i.e., before year 1 above).
Required: A. Explain the principles behind lifecycle costing and briefly state why City Co in particular should consider these lifecycle principles.
B. Produce the budgeted results for the game ‘Kezo’ and briefly assess the game’s expected performance, taking into account the whole lifecycle of the game.
C. Produce the budgeted results for the game ‘Kezo’ and briefly assess the game’s expected performance, taking into account the whole lifecycle of the game.