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lifcycle costingSolved

HHp920d ago

this is the qtn below and diff resources are giving different answers so please help out.

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. here for cost calculation what to do. shld we take into account the oppurtunity costs ? and for the patent registration do e take 500k or do we deduct the 20k salary as it is not incremental to this product?

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IAW3005IAW3005Tutor19d ago#1

Under relevant costing

As the company chose to spend time on this development, it explicitly missed out on earning $800,000 from the other product. Include the $800,000 opportunity cost.

I wouldn’t include the $500,000 or the $20,000. In fact, the entire patent application cost is treated as a sunk cost. Granted means the application process is already finished and the $500,000 has already been spent or committed. The lawyer is a permanent employee, their salary is a committed cost that they would pay regardless of whether this specific application was made.

You should include the annual fee as unlike the application cost, the $200,000 annual fee is a future, incremental cash flow. To keep the patent alive and commercialise the technology.

Under life cycle principles

You should evaluate on whether they are across the whole products life span.

Cost Item

Amount to Include

Classification / Treatment

Opportunity Cost

$800,000

Include fully as an economic cost of development.

Patent Application

$480,000

Include only the incremental cash flows

($500k – $20k lawyer salary).

Annual Patent Renewal

$200,000 / year

Include as a sustaining lifecycle cost for each year the patent is maintained.

edited
HHp919d ago#2

yes thank you that was very helpful but i dont know y kaplan didnt include the opportunity costs... sometimes their answers are confusing without explanations.

IAW3005IAW3005Tutor18d ago#3

Just ask us if you are unsure

HHp95d ago#4

qtn- A nuclear station can generate 9,000 gigawatts of electricity in each of its 40 years of useful life. Operating costs are $486m per year. Operating costs include a provision for depreciation of $175m per year to recover the $7,000m cost of building the power station.

Each nuclear station has an estimated decommissioning cost of $12,000m at the end of its life. The decommissioning cost relates to the cost of safely disposing of spent nuclear fuel.

here my doubt is shld we include the capital cost of 7000m? like in study hub they said the operating profit here already accounts for depreciation so no need to add capital cost.. like can we deduct depreciaiton? bcoz its a non cash expense right?

IAW3005IAW3005Tutor4d ago#5

Don’t include the $7,000m capital cost separately, and do remove the depreciation. Your instinct about non-cash is exactly the reason.

Capture all costs over the asset’s whole life

Cash costs over the life

  • Cash operating costs: $486m − $175m depreciation = $311m per year, so $311m × 40 = $12,440m

  • Capital cost, at the start: $7,000m

  • Decommissioning, at the end of year 40: $12,000m

  • Total life-cycle cost = $31,440m

Cost per unit (undiscounted)

  • Output: 9,000 GW × 40 years = 360,000 GW

  • $31,440m ÷ 360,000 = about $87.3m per GW