Question

Expo Manufacturing Inc., is in the process of evaluating a new product using the following information: A new transformer has two production runs each year, each with $18,000 in setup costs. The new transformer incurred $50,000 in development costs and is expected to be produced over the next three years. Direct costs of producing the transformers are $45,000 per run of 4,800 transformers each. Indirect manufacturing costs charged to each run are $115,000. Destination charges for each transformer average $6.00. Customer service expenses average $0.30 per transformer. The transformers are selling for $25.00 the first year and will increase by $3.00 each year thereafter. Sales units equal production units each year. What is the estimated life-cycle operating income for the first year? O A. 2,391,000 OB. 1,194,480 OC. 226,480 OD. (226,480)

Answer 1

The correct answer is D) ($226,480).

Supporting calculations:

Number of transformers produced in a year is 9,600 (4,800 * 2 production runs).
Yearly Operating Costs:
Setup costs ($18,000 * 2 production runs)	$36,000
Direct costs ($45,000 * 2 production runs)	$90,000
Indirect manufacturing costs ($115,000 * 2 production runs)	$230,000
Destination costs (9,600 * $6.00 per transformer)	$57,600
Customer service expenses (9,600 * $0.30 per transformer)	$2,880
Total Yearly Operating Costs	$416,480
	Year 1
Selling price per unit	$25
Number of transformers produced per year (b)	9,600
Sales Revenue (a * b)	$240,000
Less: Yearly operating costs (see working notes)	($416,480)
Less: Development costs	($50,000)
Estimated life-cycle operating income (loss) for the first year	($226,480)