11.9.12

Product Pricing using the Cost-Plus Approach Methods; Differential Analysis for Accepting Additional Business

Crystal Displays Inc. recently began production of a new product, flat panel displays, which required the investment of $1,500,000 in assets. The costs of producing and selling 5,000 units of flat panel displays are estimated as follows:

Variable costs per unit:			Fixed costs:
Direct materials	$120		Factory overhead	$250,000
Direct labor	30		Selling and administrative expenses	150,000
Factory overhead	50
Selling and administrative expenses	35
Total variable cost per unit	$235

Crystal Displays Inc. is currently considering establishing a selling price for flat panel displays. The president of Crystal Displays has decided to use the cost-plus approach to product pricing and has indicated that the displays must earn a 15% return on invested assets.

Required:

Note: Round all markup percentages to two decimal places, if required. Round all costs per unit and selling prices per unit to the nearest whole dollar.

1. Determine the amount of desired profit from the production and sale of flat panel displays. $fill in the blank 98778cfba078073_1

2. Assuming that the product cost method is used, determine the following:

a. Product cost amount per unit	$___
b. Markup percentage	____	%
c. Selling price per unit	$____

3. (Appendix) Assuming that the total cost method is used, determine the following:

a. Total cost amount per unit	$____
b. Markup percentage	___	%
c. Selling price per unit	$____

4. (Appendix) Assuming that the variable cost method is used, determine the following:

a. Variable cost amount per unit	$___
b. Markup percentage	___	%
c. Selling price per unit	$___

Plymouth Company owns equipment with a cost of $500,000 and accumulated depreciation of $300,000 that can be sold for $250,000, less a 5% sales commission. Alternatively, Plymouth Company can lease the equipment for four years for a total of $340,000, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Plymouth Company on the equipment would total $42,000 over the four-year lease.

Prepare a differential analysis on August 7 as to whether Plymouth Company should lease (Alternative 1) or sell (Alternative 2) the equipment. Use a minus sign to indicate costs or negative differential effect on income.

Differential Analysis
Lease (Alt. 1) or Sell (Alt. 2) Equipment
August 7
		Lease Equipment (Alternative 1)		Sell Equipment (Alternative 2)		Differential Effect on Income (Alternative 2)
Revenues		$___		$___		$___
Costs		___		___		____
Profit (Loss)		$___		$____		$____