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

Digital Displays Inc. recently began production of a new product, flat panel displays, which required the investment of $$6,000,000$ in assets. The costs of producing and selling $20,000$ units of flat panel displays are estimated as follows:

Variable costs per unit:Line Item DescriptionAmountDirect materials$$120$Direct labor$30$Factory overhead$50$Selling and administrative expenses$35$Total variable cost per unit$$235$

Fixed costs:Line Item DescriptionAmountFactory overhead$$1,000,000$Selling and administrative expenses$400,000$

Digital Displays Inc. is currently considering establishing a selling price for flat panel displays. The president of Digital 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 $1$ of $1$$

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

Line Item DescriptionAnswera. $$Cost amount per unit$fill in the blank $1$d$3401025$fcc$03$b$\_2$b$.$Markup percentagefill in the blank $1$d$3401025$fcc$03$b$\_3\%$c$.$Selling price per unit$fill in the blank $1$d$3401025$fcc$03$b$\_4$

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

Line Item DescriptionAnswera. $$Cost amount per unit$fill in the blank $1$d$3401025$fcc$03$b$\_5$b$.$Markup percentagefill in the blank $1$d$3401025$fcc$03$b$\_6\%$c$.$Selling price per unit$fill in the blank $1$d$3401025$fcc$03$b$\_7$

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

Line Item DescriptionAnswera. $$Variable cost amount per unit$fill in the blank $1$d$3401025$fcc$03$b$\_8$b$.$Markup percentagefill in the blank $1$d$3401025$fcc$03$b$\_9\%$c$.$Selling price per unit$fill in the blank $1$d$3401025$fcc$03$b$\_10$

$5.$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 expense

$,$ could lead management to establish a different short$-$run price.

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$6.$Assume that as of October $31,16,000$ units of flat panel displays have been produced and sold during the current year. Analysis of the domestic market indicates that $2,500$ 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 November $5,$ Digital Displays Inc. received an offer from Andes Visual Inc. for $1,000$ units of flat panel displays at $$225$ each. Andes Visual Inc. will market the units in Peru under its own brand name, and no variable selling and administrative expenses associated with the sale will be incurred by Digital 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 Andes Visual Inc. If an amount is zero, enter $"0".$

Differential Analysis

Reject $($Alt$.1)$ or Accept $($Alt$.2)$ Order

November $5$Line Item DescriptionReject Order

$($Alternative $1)$Accept Order

$($Alternative $2)$Differential Effects

$($Alternative $2)$Revenues$Revenues$Revenues$RevenuesCosts:Variable manufacturing costsVariable manufacturing costsVariable manufacturing costsVariable manufacturing costsProfit $($loss$)$$Profit $($loss$)$$Profit $($loss$)$$Profit $($loss$)$

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

YesNo