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 $600,000 in assets. The costs of producing and selling 10,000 halogen lights are estimated as follows:

Variable costs per unit:			Fixed costs:
Direct materials	$32		Factory overhead	$180,000
Direct labor	12		Selling and administrative expenses	80,000
Factory overhead	8
Selling and administrative expenses	7
Total variable cost per unit	$59

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 10% 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 the halogen light.
$

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, 7,000 units of halogen light have been produced and sold during the current year. Analysis of the domestic market indicates that 3,000 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 1,600 units of the halogen light at $57 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 Tokyo Lighting 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?

Answer 1

Step 1	Working Note
		Statement Showing Product Cost, Variable Cost & Total Cost of halogen light
			Unit	10000
		Particulars	Amount per unit	Amount (unit x $ Per unt)
		Direct Material	$                       32	$                3,20,000
		Direct Labour	$                       12	$                1,20,000
		Factory Overhead	$                          8	$                   80,000
	x	Total Product Cost ($)	52 = (32+12+8)	520000
		Selling and Administative Expenses	$                    7.00	$                   70,000
	y	Total Variable Cost ($)	59 =(52+7)	590000
		Fixed Factory Overhead	$                       18	$                1,80,000
		Fixed Selling and Administrative Expenses	$                          8	$                   80,000
	z	Total Cost ($)	85 =(59+18+8)	$               8,50,000
	Note:
	1	Product cost is those cost which relates to the production of the product only does not include selling and administrative expenses of variable nature.
	2	Variable Cost method all costs which have a variable in nature, the variable cost in nature means which increase or decrease on units produced.
	3	Total Cost Includes all cost, variable, and fixed both.
Step 2		Desired Profit per unit ($60000/10000) = 6 per unit
Step 3
	Answer 1	Desired Profit i.e 10% return on invested assets
		Assets invested	$            6,00,000
		Rate of Profit @ 10%	10%
		Desired Profit ( 600000*10%)	$               60,000
	Answer 2
	a	Product Cost amount per unit (W.No. "x" )	$                  52.00
	b	Marup % ( Desired profit per unit (see step 2) / Product cost per unit)*100   = $6/52*100 = 11.54%	11.54%
	c	Selling Price per unit (Product Cost + Product cost* Mark up %) = (52+52*11.54%)	$                  58.00
	Answer 3
	a	Total Cost amount per unit (W.No "z")	$                  85.00
	b	Marup % ( Desired profit per unit (see step 2) / Product cost per unit)*100   = $6/85*100 = 7.06%	7.06%
	c	Selling Price per unit (Product Cost + Product cost* Mark up %) = (85+85*7.06%)	$                  91.00
	Answer 4
	a	Variable Cost amount per unit (W.No "y")	$                  59.00
	b	Marup % ( Desired profit per unit (see step 2) / Product cost per unit)*100   = $6/59*100 = 10.17%	10.17%
	c	Selling Price per unit (Product Cost + Product cost* Mark up %) = (59+59*10.17%)	$                  65.00

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