Kaplan exam kit question 239 part 2

What is the total expected profit for Shoe Co on the ‘Smart Shoe’ for the two-year
period?

Shoe Co, a shoe manufacturer, has developed a new product called the ‘Smart Shoe’ for
children, which has a built-in tracking device. The shoes are expected to have a life cycle of
two years, at which point Shoe Co hopes to introduce a new type of Smart Shoe with even
more advanced technology. Shoe Co plans to use life cycle costing to work out the total
production cost of the Smart Shoe and the total estimated profit for the two-year period.
Shoe Co has spent $5.6m developing the Smart Shoe.

The time spent on this development meant that the company missed out on the opportunity
of earning an estimated $800,000 contribution from the sale of another product.
The company has applied for and been granted a ten-year patent for the technology,
although it must be renewed each year at a cost of $200,000. The costs of the patent
application were $500,000, which included $20,000 for the salary costs of Shoe Co’s lawyer,
who is a permanent employee of the company and was responsible for preparing the
application.

The following information relating to the Smart Shoe is also available for the next two years:
Total ‘Smart Shoe’ Revenue $34.3m

Sales volumes – Year 1 280,000 units and Year 2 420,000 units
Material costs per unit – Year 1 $16 and Year 2 $14
Labour costs per unit – Year 1 $8 and Year 2 $7
Total fixed production overheads $3.8 m
Selling and distribution costs $1.5m

Kaplan’s answer is $6,960,000.

Kaplan’s answer contradicts costing theory by including a sunk cost ($20,000 of the lawyer who is a permanent employee of the company) and excluding a relevant opportunity cost of $800,000.

Did Kaplan make a mistake?