Product Pricing using the Cost-Plus Approach Methods; Differential Analysis for Accepting Additional Business Digital Displays Inc. recently began production of a new product, flat panel displays, which required the investment of $6,000,000 in assets. The costs of producing and selling 20,000 units of flat panel displays are estimated as follows:
Product Pricing using the Cost-Plus Approach Methods; Differential Analysis for Accepting Additional Business
Digital Displays Inc. recently began production of a new product, flat panel displays, which required the investment of $6,000,000 in assets. The costs of producing and selling 20,000 units of flat panel displays are estimated as follows:
| Line Item Description | Amount |
|---|---|
| Direct materials | $120 |
| Direct labor | 30 |
| Factory |
50 |
| Selling and administrative expenses | 35 |
| Total variable cost per unit | $235 |
Fixed costs:
| Line Item Description | Amount |
|---|---|
| Factory overhead | $1,000,000 |
| Selling and administrative expenses | 400,000 |
Digital Displays Inc. is currently considering establishing a selling price for flat panel displays. The president of Digital Displays has decided to use the cost-plus approach to product pricing and has indicated that the displays must earn a 15% return on invested assets.
Required:
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Note: Round all markup percentages to two decimal places, if required. Round all costs per unit and selling prices per unit to the nearest whole dollar.
1. Determine the amount of desired profit from the production and sale of flat panel displays.
fill in the blank 1 of 1$
2. Assuming that the product cost method is used, determine the following:
| Line Item Description | Answer |
|---|---|
| a. Cost amount per unit | $fill in the blank a2925605201a01d_2 |
| b. Markup percentage | fill in the blank a2925605201a01d_3 % |
| c. Selling price per unit | $fill in the blank a2925605201a01d_4 |
3. (Appendix) Assuming that the total cost method is used, determine the following:
| Line Item Description | Answer |
|---|---|
| a. Cost amount per unit | $fill in the blank a2925605201a01d_5 |
| b. Markup percentage | fill in the blank a2925605201a01d_6 % |
| c. Selling price per unit | $fill in the blank a2925605201a01d_7 |
4. (Appendix) Assuming that the variable cost method is used, determine the following:
| Line Item Description | Answer |
|---|---|
| a. Variable cost amount per unit | $fill in the blank a2925605201a01d_8 |
| b. Markup percentage | fill in the blank a2925605201a01d_9 % |
| c. Selling price per unit | $fill in the blank a2925605201a01d_10 |
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.
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1. Multiply the desired profit percentage by the desired amount (invested assets).
2.
a. Divide the total
b. Divide the desired profit plus total selling and administrative expenses by the total manufacturing costs.
c. Add total cost per unit (a) and markup per unit [(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 total cost per unit (a) and markup per unit [(a) x (b)].
4.
a. Multiply the variable cost amount per unit by the number of units.
b. Divide the desired profit plus the total fixed costs by the total variable costs.
c. Add total cost per unit (a) and markup per unit [(a) x (b)].
5. What other factors influence pricing decisions?
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6. Assume that as of October 31, 16,000 units of flat panel displays have been produced and sold during the current year. Analysis of the domestic market indicates that 2,500 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 November 5, Digital Displays Inc. received an offer from Andes Visual Inc. for 1,000 units of flat panel displays at $225 each. Andes Visual Inc. will market the units in Peru under its own brand name, and no variable selling and administrative expenses associated with the sale will be incurred by Digital 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 Andes Visual Inc. If an amount is zero, enter "0".
| Line Item Description | Reject Order (Alternative 1) |
Accept Order (Alternative 2) |
Differential Effects (Alternative 2) |
|---|---|---|---|
| Revenues | $Revenues | $Revenues | $Revenues |
| Costs: | |||
| Variable manufacturing costs | Variable manufacturing costs | Variable manufacturing costs | Variable manufacturing costs |
| $Profit (loss) | $Profit (loss) | $Profit (loss) |
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