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 $2,160,000 in assets. The costs of producing and selling 10,800 units of flat panel displays are estimated as follows:

Variable costs per unit: Fixed costs: Direct materials $ 108 Factory overhead $432,000 Direct labor 23 Selling and administrative expenses 216,000 Factory overhead 49

Selling and administrative expenses 42

Total $222

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.

Required:

Note: Round all markup percentages to two decimal places. If required, round all costs per unit and selling prices per unit to the nearest cent.

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

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

The cost amount per unit. The markup percentage. The selling price of flat panel displays.

a. Cost amount per unit $ b. Markup Percentage % c. Selling price per unit $

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

The cost amount per unit. The markup percentage. The selling price of flat panel displays.

a. Cost amount per unit $ b. Markup Percentage % c. Selling price per unit $

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 $322 Select should should not Correct 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, Select could will Correct 12 of Item 1 lead management to establish a short-run price more or less than $322.

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6. Assume that as of August 1, 2014, 6,000 units of flat panel displays have been produced and sold during the current year. Analysis of the domestic market indicates that 4,800 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 1,800 units of flat panel displays at $270.00 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

$

$

$

Costs:

Variable manufacturing costs

Income (Loss)

$

$

$

b. Based on the differential analysis in part (a), should the proposal be accepted? Select Yes No Correct 1 of Item 3