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:

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. $

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

a. Cost amount per unit	$
b. Markup Percentage		%
c. Selling price per unit	$

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

a. Cost amount per unit	$
b. Markup Percentage		%
c. Selling price per unit	$

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

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

5. The cost-plus approach price should 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, could lead management to establish a short-run price more or less than the cost-plus approach price.

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".

Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
August 3
	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs:
Variable manufacturing costs
Income (Loss)	$	$	$