Question

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

Night Glow Inc. recently began production of a new product, the halogen light, which required the investment of $2,160,000 in assets. The costs of producing and selling 10,800 halogen lights 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 variable cost per unit	$222

Night Glow Inc. is currently considering establishing a selling price for the halogen light. The president of Night Glow Inc. has decided to use the cost-plus approach to product pricing and has indicated that the halogen light must earn a 20% 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 whole dollar.

1. Determine the amount of desired profit from the production and sale of halogen lights.
$

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

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

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

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

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

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

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

6. Assume that as of September 1, 6,000 units of halogen light have been produced and sold during the current year. Analysis of the domestic market indicates that 4,800 additional units of the halogen light are expected to be sold during the remainder of the year at the normal product price determined under the product cost method. On September 5, Night Glow Inc. received an offer from Tokyo Lighting Inc. for 1,800 units of the halogen light at $270.00 each. Tokyo Lighting Inc. will market the units in Japan under its own brand name, and no variable selling and administrative expenses associated with the sale will be incurred by Night Glow Inc. The additional business is not expected to affect the domestic sales of the halogen light, and the additional units could be produced using existing productive, selling, and administrative capacity.

a. Prepare a differential analysis of the proposed sale to Video Systems Inc. If an amount is zero, enter "0".

Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
September 5
	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?

Differential Analysis for Machine Replacement Proposal

Franklin Printing Company is considering replacing a machine that has been used in its factory for four years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows:

Old Machine
Cost of machine, ten-year life	$106,700
Annual depreciation (straight-line)	10,670
Annual manufacturing costs, excluding depreciation	38,500
Annual nonmanufacturing operating expenses	11,500
Annual revenue	94,000
Current estimated selling price of the machine	36,900
New Machine
Cost of machine, six-year life	$135,600
Annual depreciation (straight-line)	22,600
Estimated annual manufacturing costs, exclusive of depreciation	18,400

Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.

Required:

1. Prepare a differential analysis as of November 8 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income that would result over the six-year period if the new machine is acquired. If an amount is zero, enter "0". Use a minus sign to indicate subtracted amounts, negative amounts, or a loss.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
November 8
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues
Proceeds from sale of old machine	$	$	$
Costs
Purchase price
Annual manufacturing costs (6 yrs.)
Income (Loss)	$	$	$

2. What other factors should be considered before a final decision is reached?

Are there any improvements in the quality of work turned out by the new machine?

What opportunities are available for the use of the funds required to purchase the new machine?

Are there any improvements in the quality of work turned out by the new machine and what opportunities are available for the use of the funds required to purchase the new machine?

What affect would this decision have on employee morale?

None of these choices are correct.

Answer 1

Answer 1.
Desired Profit = $2,160,000 (Investment in Assets) X 20% (Desired ROR)
Desired Profit = $432,000
Answer 2(a).
Variable Cost
Direct Materials	108.00
Direct Labor	23.00
Factory Overhead	49.00
Fixed Factory Overhead - $432,000 / 10,800 Units	40.00
Total product Cost per Unit	220.00
Answer 2(b).
Desired Profit per Unit = $432,000 / 10,800 Units
Desired Profit per Unit = $40
Markup Percentage = $40 / $220
Markup Percentage = 18.18% (Approx.)
Answer 2©
Product Cost per Unit	220.00
Selling & Admn. Exp.
Variable	42.00
Fixed - 216,000 / 10,800 Units	20.00
Desired Profit per Unit	40.00
Selling Price per Unit	322.00
Answer 3(a).
Variable Cost per Unit	222.00
Fixed Cost
Fixed Factory Overhead - $432,000 / 10,800 Units	40.00
Selling & Admn. Exp. - 216,000 / 10,800 Units	20.00
Total Cost per Unit	282.00
Answer 3(b).
Desired Profit per Unit = $432,000 / 10,800 Units
Desired Profit per Unit = $40
Markup Percentage = $40 / $282
Markup Percentage = 14.18% (Approx.)
Answer 3©.
Total Cost per Unit	282.00
Desired Profit per Unit	40.00
Selling Price per Unit	322.00
Answer 4(a).
Variable Cost
Direct Materials	108.00
Direct Labor	23.00
Factory Overhead	49.00
Total Variable Cost per Unit	180.00
Answer 4(b).
Desired Profit per Unit = $432,000 / 10,800 Units
Desired Profit per Unit = $40
Markup Percentage = $40 / $180
Markup Percentage = 22.22% (Approx.)
Answer 4©
Variable Cost per Unit	180.00
Fixed Factory Overhead - $432,000 / 10,800 Units	40.00
Selling & Admn. Exp.
Variable	42.00
Fixed - 216,000 / 10,800 Units	20.00
Desired Profit per Unit	40.00
Selling Price per Unit	322.00
Answer 5.
Other factors are:
1. Prices of the competitors products.
2. Life cycle of the product.
Answer 6-a.
Diferential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
Sep -5
	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effect on Income (Alternative 2)
Sales in Units	6,000	7,800
Revenues -	1,932,000	2,418,000	486,000
Variable Manufacturing Costs	1,080,000	1,404,000	324,000
Income (Loss)	852,000	1,014,000	162,000
Answer 6-b.
Net Income will be increased by $162,000, so proposal should be accepted.