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

Display Labs Inc. recently began production of a new product, flat panel displays, which required the investment of $2,340,000 in assets. The costs of producing and selling 11,700 units of flat panel displays are estimated as follows:

Variable costs per unit:			Fixed costs:
Direct materials	$ 117		Factory overhead	$468,000
Direct labor	25		Selling and administrative expenses	234,000
Factory overhead	53
Selling and administrative expenses	46
Total	$241

Display Labs Inc. is currently considering establishing a selling price for flat panel displays. The president of Display Labs 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.

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	$
b. Markup Percentage		%
c. Selling price per unit	$

5. The cost-plus approach price of $341 Selectshouldshould notCorrect 11 of Item 1 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, SelectcouldwillCorrect 12 of Item 1 lead management to establish a short-run price more or less than $341

6. Assume that as of August 1, 2014, 6,500 units of flat panel displays have been produced and sold during the current year. Analysis of the domestic market indicates that 5,200 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, Display Labs Inc. received an offer from Video Systems Inc. for 2,000 units of flat panel displays at $292.50 each. Video Systems Inc. will market the units in Canada under its own brand name, and no selling and administrative expenses associated with the sale will be incurred by Display Labs 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 Video Systems Inc. If an amount is zero, enter zero "0".

Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
August 3, 2014
		Reject Order (Alternative 1)		Accept Order (Alternative 2)		Differential Effect on Income (Alternative 2)
Revenues		$ Correct 8 of Item 2		$ Correct 9 of Item 2		$ Correct 10 of Item 2
Costs:
Variable manufacturing costs		Correct 13 of Item 2		Correct 14 of Item 2		Correct 15 of Item 2
Income (Loss)		$ Correct 17 of Item 2		$ Correct 18 of Item 2		$ Correct 19 of Item 2

b. Based on the differential analysis in part (a), should the proposal be accepted? SelectYesNoCorrect 1 of Item 3