the cost-plus approach methods; differential analysis for accepting additional business

Instructions

Labels and Amount Descriptions

Starting Questions

Differential Analysis

Final Question

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Instructions

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:

1	Variable costs per unit:
2	Direct materials	$120.00
3	Direct labor	30.00
4	Factory overhead	50.00
5	Selling and administrative expenses	35.00
6	Total variable cost per unit	$235.00
7	Fixed costs:
8	Factory overhead	$250,000.00
9	Selling and administrative expenses	150,000.00

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:

1.

Determine the amount of desired profit from the production and sale of flat panel displays.

2.

Assuming that the product cost method is used, determine (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of flat panel displays.

3.

(Appendix) Assuming that the total cost method is used, determine (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of flat panel displays.*

4.

(Appendix) Assuming that the variable cost method is used, determine (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of flat panel displays.*

5.

Comment on any additional considerations that could influence establishing the selling price for flat panel displays.

6.

Assume that as of August 1, 3,000 units of flat panel displays have been produced and sold during the current year. Analysis of the domestic market indicates that 2,000 additional units are expected to be sold during the remainder of the year at the normal product price determined under the product cost method. On August 3, Crystal Displays Inc. received an offer from Maple Leaf Visual Inc. for 800 units of flat panel displays at $225 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. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter 0. A colon (:) will automatically appear if required.

b.

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

*Round your markup percentage to two decimal places and your final answer to nearest dollar amount.

Differential Analysis

Reject (Alternative 1) or Accept (Alternative 2) Order

August 3

1		Reject Order	Accept Order	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
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