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

Twilight Lumina Company recently began production of a new product, the halogen light, which required an investment of $1,440,000 in assets. The costs of producing and selling 7,200 halogen lights are estimated as follows:

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

Twilight Lumina Company is currently considering establishing a selling price for the halogen light. The president of Twilight Lumina Company has decided to use the cost-plus approach to product pricing and has indicated that the halogen light must earn a 20% rate of return on invested assets.

Required:

Note: Round all percentages to two decimal places and all dollar amounts to the nearest dollar.

1. Determine the amount of desired profit from the production and sale of the halogen light.
$_____________

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

a. Cost amount per unit	$______________
b. Markup percentage	_______________%
c. Selling price of the halogen light (rounded to the nearest dollar)	$_______________

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

a. Cost amount per unit	$_____________
b. Markup percentage	_____________%
c. Selling price of the halogen light (rounded to the nearest dollar)	$_____________

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

a. Cost amount per unit	$_______________
b. Markup percentage	________________%
c. Selling price of the halogen light (rounded to the nearest dollar)	$_______________

5. Comment on any additional considerations that could influence establishing the selling price for the halogen light.

• Prices of competing products.
• General economic conditions in the market.
• Prices of competing products and General economic conditions in the market.
• None of the above

6. Assume that 4,000 units of the halogen light have been produced and sold during the current year. Analysis of the domestic market indicates that 3,200 additional units of the halogen light are expected to be sold during the remainder of the year at the normal product price determined under the total cost concept. Twilight Lumina Company received an offer from Contech Inc. for 1,200 uunits of the halogen light at $180.00 each. Contech Inc. will market the units in Southeast Asia under its own brand name, and no selling and administrative expenses associated with the sale will be incurred by Twilight Lumina Company. The additional business is not expected to affect the domestic sales of the halogen light, and the additional units could be produced using existing capacity.

a. Prepare a differential analysis report of the proposed sale to Contech Inc.

Twilight Lumina Company
Proposal to Sell to Contech Inc.
Differential revenue from accepting offer:
	$__________
Differential cost of accepting offer:	___________
Differential income from accepting offer	$__________

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