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

Crystal Displays Inc. recently began production of a new product, flat panel displays, which required the investment of $1,980,000 in assets. The costs of producing and selling 9,900 units of flat panel displays are estimated as follows:

Variable costs per unit:			Fixed costs:
Direct materials	$99		Factory overhead	$396,000
Direct labor	21		Selling and administrative expenses	198,000
Factory overhead	45
Selling and administrative expenses	39
Total	$204

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 20% rate of return on invested assets.

Required:

Question Content Area

Note: Round all markup percentages to two decimal places. 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 bd6e71098048fff_1

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

1. The cost amount per unit.
2. The markup percentage.
3. the selling price of flat panel displays.

a. Cost amount per unit	$fill in the blank bd6e71098048fff_2
b. Markup percentage	fill in the blank bd6e71098048fff_3	%
c. Selling price per unit	$fill in the blank bd6e71098048fff_4

3. Appendix Assuming that the total cost concept is used, determine the following:

1. The cost amount per unit.
2. The markup percentage.
3. The selling price of flat panel displays.

a. Cost amount per unit	$fill in the blank bd6e71098048fff_5
b. Markup percentage	fill in the blank bd6e71098048fff_6	%
c. Selling price per unit	$fill in the blank bd6e71098048fff_7

4. Appendix Assuming that the variable cost concept is used, determine the following:

1. The cost amount per unit.
2. The markup percentage.
3. The selling price of flat panel displays.

a. Variable cost amount per unit	$fill in the blank bd6e71098048fff_8
b. Markup percentage	fill in the blank bd6e71098048fff_9	%
c. Selling price per unit	$fill in the blank bd6e71098048fff_10

5. The cost-plus approach price

shouldshould not

be viewed as a general guideline for establishing long-run normal prices. Other considerations, such as the price of competing products and general economic conditions of the marketplace,

couldwill

lead management to establish a short-run price more or less than the cost-plus approach price.

Question Content Area

6. Assume that as of August 1, 5,500 units of flat panel displays have been produced and sold during the current year. Analysis of the domestic market indicates that 4,400 additional units are expected to be sold during the remainder of the year at the normal product price determined under the product cost concept. On August 3, Crystal Displays Inc. received an offer from Maple Leaf Visual Inc. for 1,700 units of flat panel displays at $247.50 each. Maple Leaf Visual Inc. will market the units in Canada under its own brand name, and no variable selling and administrative expenses associated with the sale will be incurred by Crystal Displays Inc. The additional business is not expected to affect the domestic sales of flat panel displays, and the additional units could be produced using existing factory, selling, and administrative capacity.

a. Prepare a differential analysis of the proposed sale to Maple Leaf Visual Inc. If an amount is zero, enter zero "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis Reject Order (Alt. 1) or Accept Order (Alt. 2) August 3

	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$fill in the blank 2f71ecf8ffecfe6_1	$fill in the blank 2f71ecf8ffecfe6_2	$fill in the blank 2f71ecf8ffecfe6_3
Costs:
Variable manufacturing costs	fill in the blank 2f71ecf8ffecfe6_4	fill in the blank 2f71ecf8ffecfe6_5	fill in the blank 2f71ecf8ffecfe6_6
Profit (loss)	$fill in the blank 2f71ecf8ffecfe6_7	$fill in the blank 2f71ecf8ffecfe6_8	$fill in the blank 2f71ecf8ffecfe6_9

Question Content Area

b. Based on the differential analysis in part (a), should the proposal be accepted?

YesNo