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	$118.00
3	Direct labor	30.00
4	Factory overhead	50.00
5	Selling and administrative expenses	34.00
6	Total variable cost per unit	$232.00
7	Fixed costs:
8	Factory overhead	$254,000.00
9	Selling and administrative expenses	149,000.00

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 11% 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 800 units of flat panel displays at $230 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.

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

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

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

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

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.

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
5
6

6b. Based on the differential analysis in part (a), should the proposal be accepted?

The company is indifferent since the result is the same regardless of which alternative is chosen.

Yes

No

Answer 1

1.Amount of desired profit from the production and sale of flat panel displays:

11% return on invested assets.

& Investment in assets= $1,600,000

So,desired profit=1600000*11%=

176000

2...Product Cost = Direct Material +Direct Labor+ Manufacturing Overhead
Product cost=All costs of manufacturing the product,both variable & fixed
Direct materials	118
Direct labor	30
Variable Factory overhead	50
Fixed Factory overhead(254000/5000)	50.8
Total product cost /unit	248.8	35.2/248.8=14.15%
Mark-up %     (35.2/248.8=14.15%)	35.2	176000/5000
Selling price/unit	284

3...Total cost=All costs of manufacturing the product +selling and administrative expenses
Direct materials	118
Direct labor	30
Variable Factory overhead	50
Fixed Factory overhead(254000/5000)	50.8
Total product cost /unit	248.8
Variable S&A exp.	34
Fixed S&A exp.(149000/5000)	29.8
Total cost/unit	312.6	35.2/312.6=11.26%
Mark-up % (11.26%)	35.2	176000/5000
Selling price/unit	347.8

4. Only the variable costs plus approach
Direct materials	118
Direct labor	30
Variable Factory overhead	50
Variable S&A exp.	34
Total cost/unit	232	35.2/232=15.17%
Mark-up % (15.17%)	35.2	176000/5000
Selling price/unit	267.2

5.Additional considerations that could influence establishing the selling price for flat panel displays are:

a.Competitors' prices for the same variant (model)

Whatever our cost components be, our selling price needs to be some-what comparable

b. the accuracy in predicting the demand for the product, at a specific selling price

c. Various constraints due to the laws of the land such as price control

6.a.	Per unit	5000 units	5800 units	Differetial	Explanation
Cash flows from operating activities
Costs
Amount Descriptions
Cash payments for merchandise
Cash received from customers
Fixed manufacturing costs	50.8	254000	254000	0
Income (loss)	35.2	176000	201600	25600	(230-198)*800
Revenues	284	1420000	1604000	184000	230*800
Variable manufacturing costs	198	990000	1148400	158400	198*800

6 b..Based on the differential analysis in part (a), the proposal SHOULD be accepted
as it brings in an additional income of $ 25600