Question

Crystal Displays Inc. recently began production of a new product, flat panel displays, which required the investment of $1,600,000 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 $122.00 3 Direct labor 32.00 4 Factory overhead 48.00 5 Selling and administrative expenses 34.00 6 Total variable cost per unit $236.00 7 Fixed costs: 8 Factory overhead $247,000.00 9 Selling and administrative expenses 146,000.00 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 17% return on invested assets. Required: 1. Determine the amount of desired profit from the production and sale of flat panel displays. 2. Assuming that the product cost method is used, determine (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of flat panel displays.* 3. (Appendix) Assuming that the total cost method is used, determine (a) the cost amount per unit, (b) the markup percentage and (c) the selling price of flat panel displays.* 4. (Appendix) Assuming that the variable cost method is used, determine (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of flat panel displays.* 5. Comment on any additional considerations that could influence establishing the selling price for flat panel displays. 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 600 units of flat panel displays at $228 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. Labels Cash flows from operating activities Costs Amount Descriptions Cash payments for merchandise Cash received from customers Fixed manufacturing costs Income (loss) Revenues Variable manufacturing costs 1. Determine the amount of desired profit from the production and sale of flat panel displays. $272,000.00 Points: 1 / 1 2. Assuming that the product cost method is used, determine (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of flat panel displays. Round your markup percentage and selling price to two decimal places. Cost amount per unit $ Markup percentage % Selling price $ Points: 0 / 3 3. (Appendix) Assuming that the total cost method is used, determine (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of flat panel displays. Round your markup percentage and selling price to two decimal places. Cost amount per unit $ Markup percentage % Selling price $ Points: 0 / 3 4. (Appendix) Assuming that the variable cost method is used, determine (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of flat panel displays. Round your markup percentage and selling price to two decimal places. Cost amount per unit $ Markup percentage % Selling price $ Points: 0 / 3 5. Comment on any additional considerations that could influence establishing the selling price for flat panel displays. 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 market place Correct , could lead management to establish a different short-run price. Points: 1 / 1 Check My Work 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 the total selling and administrative expenses by the total manufacturing costs. c. Add cost (a) and markup [(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 cost (a) and markup [(a) x (b)]. 4. a. Multiply the variable cost amount per unit by the number of units produced. b. Divide the desired profit plus the total fixed costs by the total variable costs. c. Add cost (a) and markup[(a) x (b)]. 5. What other factors influence pricing decisions? 6a. 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. Question not attempted. Score: 0/53 Differential Analysis Reject (Alternative 1) or Accept (Alternative 2) Order August 3 1 Reject Order Accept Order Differential Effect on Income 2 (Alternative 1) (Alternative 2) (Alternative 2) 3 4 (Label) 5 6

Answer 1

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1. Determine the amount of desired profit from the production and sale of flat panel displays.
Investment in Assets	a	$1,600,000
Required Return	b	17%
Desired Profit	a*b	$   272,000
2. Assuming that the product cost method is used
a.
Direct Material		$     122.00
Direct Labor		$        32.00
Variable Overhead		$        48.00
Fixed Overhead	247000/5000	$        49.40
Total Product Cost per unit		$     251.40
b.
Profit per Unit	272000/5000	$        54.40
Mark Up Percentage	54.40/251.4	21.64%
c.
Total Product Cost:
Direct Material		$     122.00
Direct Labor		$        32.00
Variable Overhead		$        48.00
Variable Selling and Admin		$        34.00
Fixed Overhead	247000/5000	$        49.40
Fixed Selling and Admin	146000/5000	$        29.20
Total Product Cost		$     314.60
Add: Profit per Unit		$        54.40
Selling Price		$     369.00
3. Assuming that the Total cost method is used
a.
Direct Material		$     122.00
Direct Labor		$        32.00
Variable Overhead		$        48.00
Variable Selling and Admin		$        34.00
Fixed Overhead	247000/5000	$        49.40
Fixed Selling and Admin	146000/5000	$        29.20
Total Cost per unit		$     314.60
b.
Profit per Unit	272000/5000	$        54.40
Mark Up Percentage	54.40/314.6	17.29%
c.
Total Product Cost:
Direct Material		$     122.00
Direct Labor		$        32.00
Variable Overhead		$        48.00
Variable Selling and Admin		$        34.00
Fixed Overhead	247000/5000	$        49.40
Fixed Selling and Admin	146000/5000	$        29.20
Total Cost		$     314.60
Add: Profit per Unit		$        54.40
Selling Price		$     369.00
4. Assuming that the Total cost method is used
a.
Direct Material		$     122.00
Direct Labor		$        32.00
Variable Overhead		$        48.00
Variable Selling and Admin		$        34.00
Total Variable Cost Per unit		$     236.00
b.
Profit per Unit	272000/5000	$        54.40
Mark Up Percentage	54.40/236	23.05%
c.
Total Product Cost:
Direct Material		$     122.00
Direct Labor		$        32.00
Variable Overhead		$        48.00
Variable Selling and Admin		$        34.00
Fixed Overhead	247000/5000	$        49.40
Fixed Selling and Admin	146000/5000	$        29.20
Total Product Cost		$     314.60
Add: Profit per Unit		$        54.40
Selling Price		$     369.00
Part -5
a. Price being offered by Competitors
b. Product Life Cycle
Part -6
Incremental Sale	600*228	$   136,800
Less:
Incremental Variable Cost
Direct Material	122*600	$     73,200
Direct Labor	32*600	$     19,200
Variable Overhead	48*600	$     28,800
Variable Selling and Admin	NA as given
Incremental Income		$     15,600
yes, Proposal should be accepted as it is increaing overall profit by % 15,600