[papi123]

Thank you so much, appreciate it.

[papi123]

Thank you it was helpful. I have another question regarding. ” CHARM CO, Kaplan Kit “.

Charm Inc., a software company, has developed a new game, ‘Fingo’, which it plans to
launch in the near future. Sales of the new game are expected to be very strong, following a
favourable review by a popular PC magazine. Charm Inc. has been informed that the review
will give the game a ‘Best Buy’ recommendation. Sales volumes, production volumes and
selling prices for ‘Fingo’ over its four-year life are expected to be as follows:
Year
Sales and production (units)
Selling price($ per game)
1 – 150,000
2 – 70,000
3 – 60,000
4 – 60,000
Financial information on ‘Fingo’ for the first year of production is as follows:
Direct material cost – $5.40 per game
Other variable production cost – $6.00 per game
Fixed costs – $4.00 per game

Advertising costs to stimulate demand are expected to be $650,000 in the first year of
production and $100,000 in the second year of production. No advertising costs are
expected in the third and fourth years of production. Fixed costs represent incremental
cash fixed production overheads. ‘Fingo’ will be produced on a new production machine
costing $800,000. Tax allowable depreciation will be claimed on a reducing balance basis at
a rate of 25%. The machine will have a useful life of four years at the end of which no scrap
value is expected.
Charm Inc. pays tax on profit at a rate of 30% per year and tax liabilities are settled in the
year in which they arise.

Qs: Regarding the fixed cost, why they take fixed cost constant from Y1 to Y4, as number of unit changes. Why don’t we multiply ( 4 * units of each year ) to fixed cost per year. Thank you

[papi123]

I was concern toward, how the Variable cost and Fixed Cost increase by 3% every year ( 3%, 6%, 9%, 12%). Thank you in advance.

[Author]

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