Veriplex manufactures process control equipment. This 100-year-old German company has re...

Veriplex manufactures process control equipment. This 100-year-old German company has recently acquired another firm that has a design for a new proprietary process control system. A key component of the new system to be manufactured by Veriplex is called the VTrap, a new line of precision air-flow gauges.

Veriplex uses tight financial budgets linked to annual bonuses to control its manufacturing departments. Each manufacturing department is a cost center. The VTrap gauge is being manufactured in Veriplex’s gauge department, which also manufactures an existing line of gauges. The gauge department’s budget for the current year consists of two parts: €6.60 million for manufacturing the existing line of gauges and €0.92 million to develop and manufacture VTrap.

The gauge department is responsible for introducing VTrap, which has been in development in the gauge department since the beginning of the year. The new gauge will be manufactured using much of the same equipment and personnel as the existing gauges. VTrap is an integral part of the proprietary process control system that Veriplex hopes will give it a sustainable competitive advantage. Senior management is heavily committed to this strategy. Senior engineering staff members are always in the gauge department working with the manufacturing personnel to modify and refine both the gauges’ design and the production processes to produce them. (Note: Engineering department costs are not assigned to the gauge department.)

By the end of the fiscal year, the gauge department had spent €1.30 million on the VTrap program and €6.39 million on existing gauge production. Both the new and existing gauge lines achieved their target production quotas and quality goals for the year.

Required:

a. Prepare a financial statement for the gauge department that details its financial performance for the fiscal year just completed.

b. Upon further investigation of previous new product introductions, you discover the same patterns in other departments between new and existing products and their budgets and actual costs. What are some possible reasons why the pattern in the gauge department is not an isolated occurrence but has occurred with other new product introductions and is likely to occur with future new product introductions?