Question

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 600 units of flat panel displays at $226 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 and selling price to two decimal places. Crystal Displays Inc. recently began production of a new product, flat panel displays, which required the investment of $1,700,000 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 $119.00 3 Direct labor 32.00 4 Factory overhead 50.00 5 Selling and administrative expenses 36.00 6 Total variable cost per unit $237.00 7 Fixed costs: 8 Factory overhead $253,000.00 9 Selling and administrative expenses 147,000.00 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 19% return on invested assets.

Answer 1

Crystal Displays Inc

1. Differential analysis of the proposed sale to Maple Leaf Visual Inc:

Incremental Sales	600 x $226	$135,600
Less: differential costs -variable production costs	600 x ($119 + $32 + $50)	$120,600
Incremental profit	600 x ($226 - $201)	$15,000

1. Since no selling costs are incurred for the special order, these costs are excluded for differential analysis.
2. Factory fixed overhead costs are not relevant as the company has excess production capacity.
3. Direct production costs, including direct materials, direct labor and factory overhead are relevant for the analysis.

1. Based on the differential analysis in part a, above, the proposal should be accepted. The proposal for sale of 600 units earns an incremental profit of $15,000. Hence, the proposal is profitable.

1. Determination of selling price, criteria – cost plus pricing, desired ROI is 19%

Desired ROI –

Investment = $1,700,000

ROI – 19%

Return on assets = 19% x 1,700,000 = $323,000

Number of units = 5,000

Estimated return per unit = 323,000/5,000 = $64.60

Assuming the total cost per unit is used to fix the selling price,

Total cost per unit –

Direct materials$119

Direct labor$32

Factory overhead$100.60

Selling and administrative expenses $65.40

Total cost per unit = $317

Add: markup$64.60

Desired selling price $381.60

Hence, the desired selling price for flat panel display = $381.60

Mark up percentage = mark up/selling price = (64.60/381.60) x 100 = 16.99%

Computation of overhead cost per unit:

• Factory overhead

Variable factory overhead = $50

Fixed factory overhead = $253,000/5,000 = $50.60

Total factory overhead = $100.60

• Selling and administration overhead

Variable selling overhead = $36

Fixed selling overhead = 147,000/5,000 = $29.40

Total selling overhead = $65.40