11-37 Relevant costs, opportunity costs. Gavin Martin, the general manager of Or

Question

11-37 Relevant costs, opportunity costs. Gavin Martin, the general manager of Oregano Software, must decide when to release the new version of Oregano's spreadsheet package, Easyspread 2.0. Development of Easyspread 2.0 is complete; however, the diskettes, compact discs, and user manuals have not yet been produced. The product can be shipped starting July 1, 2017 The major problem is that Oregano has overstocked the previous version of its spreadsheet pack- age, Easyspread 1.0. Martin knows that once Easyspread 2.0 is introduced, Oregano will not be able to sell any more units of Easyspread 1.0. Rather than just throwing away the inventory of Easyspread 1.0, Martin is wondering if it might be better to continue to sell Easyspread 1.0 for the next three months and introduce Easyspread 2.0 on October 1, 2017, when the inventory of Easyspread 1.0 will be sold out The following information is available: Selling price Variable cost per unit of diskettes, compact discs, user manuals Development cost per unit Marketing and administrative cost per unit Total cost per unit Operating income per unit Easyspread 1.0 $165 24 60 31 115 Easyspread 2.0 $215 38 95 41 174 $ 41 S 50 Development cost per unit for each product equals the total costs of developing the software product divided by the anticipated unit sales over the life of the product. Marketing and administrative costs are fixed costs in 2017, incurred to support all marketing and administrative activities of Oregano Software. Marketing and administrative costs are allocated to products on the basis of the budgeted revenues of each product. The preceding unit costs assume Easyspread 2.0 will be introduced on October 1, 2017 1. On the basis of financial considerations alone, should Martin introduce Easyspread 2.0 on July 1,2017 or wait until October 1, 2017? Show your calculations, clearly identifying relevant and irrelevant rev enues and costs 2What other factors might Gavin Martin consider in making a decision?

Explanation / Answer

1 Relavant items for decision making Easyspread 1.0 Easyspread 2.0 Selling price 165 215 Variable cost per unit 0 38 Operating income 165 177 Variable cost of Easyspread 1.0 is a sunk cost Development cost cost for both the products are sunk costs Marketing and administrative cost for both products are fixed in nature 2 Other factors to be considered: Customer satisfaction with Eastspread 2.0 Quality of Easyspread 2.0 Debugging of Easyspread 2.0 and correcting errors

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