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Product Pricing using the Cost-Plus Approach Methods; Differential Analysis for Accepting Additional Business

Crystal Displays Inc. recently began production of a new product, flat panel displays, which required the investment of $1,500,000 in assets. The costs of producing and selling 5,000 units of flat panel displays are estimated as follows:

Variable costs per unit:			Fixed costs:
Direct materials	$120		Factory overhead	$250,000
Direct labor	30		Selling and administrative expenses	150,000
Factory overhead	50
Selling and administrative expenses	35
Total variable cost per unit	$235

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:

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Note: Round all markup percentages to two decimal places, if required. 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 f05943fb0f84011_1

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

a. Product cost amount per unit	$fill in the blank f05943fb0f84011_2
b. Markup percentage	fill in the blank f05943fb0f84011_3	%
c. Selling price per unit	$fill in the blank f05943fb0f84011_4

3. (Appendix) Assuming that the total cost method is used, determine the following:

a. Total cost amount per unit	$fill in the blank f05943fb0f84011_5
b. Markup percentage	fill in the blank f05943fb0f84011_6	%
c. Selling price per unit	$fill in the blank f05943fb0f84011_7

4. (Appendix) Assuming that the variable cost method is used, determine the following:

a. Variable cost amount per unit	$fill in the blank f05943fb0f84011_8
b. Markup percentage	fill in the blank f05943fb0f84011_9	%
c. Selling price per unit	$fill in the blank f05943fb0f84011_10

5. The cost-plus approach price computed above should be viewed as a general guideline for establishing long-run normal prices; however, other considerations, such as

the price of competing products and general economic conditions of the marketplacefixed costs incurred and depreciation expensethe price of competing products and general economic conditions of the marketplace

, could lead management to establish a different short-run 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 Factory overhead) by the number of units produced.

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

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

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

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

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

5. What other factors influence pricing decisions?

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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. If an amount is zero, enter "0".

Differential Analysis Reject (Alt. 1) or Accept (Alt. 2) Order August 3

	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$fill in the blank 0088b3062050fac_1	$fill in the blank 0088b3062050fac_2	$fill in the blank 0088b3062050fac_3
Costs
Variable manufacturing costs	fill in the blank 0088b3062050fac_4	fill in the blank 0088b3062050fac_5	fill in the blank 0088b3062050fac_6
Profit (loss)	$fill in the blank 0088b3062050fac_7	$fill in the blank 0088b3062050fac_8	$fill in the blank 0088b3062050fac_9

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

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