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 $1,440,000 in assets. The costs of producing and selling 7,200 units of flat panel displays are estimated as follows:

Variable costs per unit:			Fixed costs:
Direct materials	$72		Factory overhead	$288,000
Direct labor	16		Selling and administrative expenses	144,000
Factory overhead	32
Selling and administrative expenses	28
Total	$148

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:

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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 322f1500efa5002_1

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

The cost amount per unit.

The markup percentage.

the selling price of flat panel displays.

a. Cost amount per unit	$fill in the blank 322f1500efa5002_2
b. Markup percentage	fill in the blank 322f1500efa5002_3	%
c. Selling price per unit	$fill in the blank 322f1500efa5002_4

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

The cost amount per unit.

The markup percentage.

The selling price of flat panel displays.

a. Cost amount per unit	$fill in the blank 322f1500efa5002_5
b. Markup percentage	fill in the blank 322f1500efa5002_6	%
c. Selling price per unit	$fill in the blank 322f1500efa5002_7

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

The cost amount per unit.

The markup percentage.

The selling price of flat panel displays.

a. Variable cost amount per unit	$fill in the blank 322f1500efa5002_8
b. Markup percentage	fill in the blank 322f1500efa5002_9	%
c. Selling price per unit	$fill in the blank 322f1500efa5002_10

5. The cost-plus approach price

shouldshould notshould

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,

couldwillcould

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

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1. Multiply the desired profit percentage by the desired amount (invested assets).

2. a. Divide the total manufacturing costs (direct labor, direct materials, and overhead) by the number of units produced.

b. Divide the desired profit plus the selling and administrative expenses by the total product costs.

c. Add cost (a) and markup [(a) x (b)].

3. a. Divide all variable and fixed costs by the number of units produced.

b. Divide the desired profit by the total costs.

c. Add cost (a) and markup [(a) x (b)].

4. a. Multiply the variable cost per unit by the number of units produced.

b. Divide the desired profit plus the total fixed costs by the total variable costs.

c. Add cost (a) and markup [(a) x (b)].

5. What other factors influence pricing decisions?

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6. Assume that as of August 1, 4,000 units of flat panel displays have been produced and sold during the current year. Analysis of the domestic market indicates that 3,200 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 1,200 units of flat panel displays at $180.00 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 8e67f8044fdcfd4_1	$fill in the blank 8e67f8044fdcfd4_2	$fill in the blank 8e67f8044fdcfd4_3
Costs:
Variable manufacturing costs	fill in the blank 8e67f8044fdcfd4_4	fill in the blank 8e67f8044fdcfd4_5	fill in the blank 8e67f8044fdcfd4_6
Profit (loss)	$fill in the blank 8e67f8044fdcfd4_7	$fill in the blank 8e67f8044fdcfd4_8	$fill in the blank 8e67f8044fdcfd4_9

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6. a. Subtract the additional manufacturing costs from the additional revenues. Determine the differential effect on income of the revenues, costs, and income (loss).

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

YesNoYes

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6. b. Which alternative has the most desirable effect on income?

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Product Pricing using the Cost-Plus Approach Concepts; Differential Analysis for Accepting Additional Business estimated as follows: 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. 3. Appendix Assuming that the total cost concept is used, determine the following: a. The cost amount per unit. b. The markup percentage. c. The selling price of flat panel displays. 4. Appendix Assuming that the variable cost concept is used, determine the following: a. The cost amount per unit. b. The markup percentage. c. The selling price of flat panel displays. conditions of the marketplace, lead management to establish a short-run price more or less than the cost-plus approach price. Feodhack Treck My Work b. Based on the differential analysis in part (a), should the proposal be accepted