Kate Stephens, the COO of BioDerm, has asked her cost management team for a product-line profitability analysis for her company's two products, Xderm and Yderm. The two skin-care products require a large amount of research and development, as well as advertising. After receiving the following statement from BioDerm's accountants, Kate concludes that Xderm is the more profitable product and that perhaps cost-cutting measures should be applied to Yderm.

Percent of R&D & selling costs traceable to Xderm = 75%
Required
1. Explain why Kate may be wrong in his assessment of the relative performances of the two products.
2. Suppose that 75 percent of the R&D and selling expenses are traceable to Xderm. Prepare life-cycle income statements for each product and calculate the return on sales. What does this tell you about the importance of accurate life-cycle costing?
3. Consider again your answers in requirements 1 and 2, and the the following additional information. R&D and selling expenses are substantially higher for Xderm because it is a new product. Kate has strongly supported development of the new product, including the high selling and R&D expenses. She has assured senior managers that the Xderm investment will pay off in improved profits for the company. What are the ethical issues, if any, facing Kate as she reports to top management on the profitability of the company's two products?

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Xderm Yderm Total Sales Cost of goods sold $2,900,000 $2,000,000 S2,000,000 S1,500,000 S4,900,000 S3,500,000 $1.400,000 $800,000 $100,000 $500.000 Gross profit Research and development Selling expenses Profit before taxes