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P13-48 Kate Stephens, the COO of BioDerm, has asked her cost management team for a...

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Accounting

P13-48 Kate Stephens, the COO of BioDerm, has asked her cost management team for a product-line profitability analysis for her firm's two products, Xderm and Yderm. The two skin care products require a large amount of research and development and advertising. After receiving the following statement from BioDerm's accountants, Kate concludes that Xderm is the more profitable product and that perhaps cost-cutting measures should be applied to Yderm:

Required:

  1. Explain why Kate may be wrong in her assessment of the relative performance of the two products.
  2. Suppose that 75 percent of the R&D and selling expenses are traceable to Xderm. Using the assumption, compute the life-cycle income for each product and the return on sales for each product.
  3. Consider your answers to requirements 1 and 2 with the following additional information: R&D and selling expenses are sustaintially higher for Xderm because it is a new product. Kate has strongly supported development of the new product, including the high selling and R&D expenses. She has assured senior managers that the management on the profitability of the firm's two products?

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