a)
Product pricing: Product pricing is the method used for fixing the price for the products sold or the services offered to the consumers.
Product cost pricing: Product cost pricing is a pricing technique which sums up the costs involved in the production of the product alone and the markup is added to the sum.
Total cost pricing: Total cost pricing is a pricing technique which sums up all the costs involved in the production of the product and the markup is added to the sum.
Total Variable Cost: Total variable cost refers to the costs involved in the production of the product.
Markup Percentage: The markup percentage is the percentage of additional costs added to the product cost to get the selling price of the product.
Selling Price: Selling price is calculated by summing up the product cost per unit and the per unit markup cost
To Determine: The desired profit of Company CD.
a)
Explanation of Solution
Desired Profit: Company CD aims at earning a profit of 15% of the total investment made of $1,500,000.
Calculate the desired profit of Company CD.
Hence, the desired profit of Company CD is $225,000.
b)
On the basis of product cost concept, for Company CD
- i. Cost per unit
- ii. Markup percentage
- iii. Selling price of flat panel displays
b)
Explanation of Solution
Product cost pricing: Product cost pricing is a pricing technique which sums up the costs involved in the production of the product alone and the markup is added to the sum.
i)
Calculate the cost per unit of flat panel display.
Variable Cost (1) | $1,000,000 |
Fixed Cost | $250,000 |
Total | $1,250,000 |
Divide by: Number of units | 5,000 |
Cost per unit | $250 |
Hence, the cost per unit of flat panel display is $250.
Working Note:
Calculate the variable cost.
ii)
Calculate the markup percentage of flat panel display.
Hence, the markup percentage of flat panel display is 44%,
iii)
Calculate the selling price per unit of flat panel display
Cost per unit | $250 |
Markup per unit
|
$110 |
Selling price per unit | $360 |
Hence, the selling price per unit of flat panel display is $360.
c)
On the basis of total cost concept, for Company CD
- i. Cost per unit
- ii. Markup percentage
- iii. Selling price of flat panel displays
c)
Explanation of Solution
Total cost pricing: Total cost pricing is a pricing technique which sums up all the costs involved in the production of the product and the markup is added to the sum.
i)
Calculate the cost per unit of flat panel display.
Variable Cost
|
$1,175,000 |
Fixed Cost
|
$400,000 |
Total | $1,575,000 |
Divide by: Number of units | 5,000 |
Cost per unit | $315 |
Hence, the cost per unit of flat panel display is $315.
ii)
Calculate the markup percentage of flat panel display (rounded).
Hence, the markup percentage of flat panel display, rounded o 2 places is 14.29%,
iii)
Calculate the selling price per unit of flat panel display
Cost per unit | $315 |
Markup per unit
|
$45 |
Selling price per unit | $360 |
Hence, the selling price per unit of flat panel display is $360.
d)
On the basis of variable cost concept, for Company CD
- i. Cost per unit
- ii. Markup percentage
- iii. Selling price of flat panel displays
d)
Explanation of Solution
Total Variable Cost: Total variable cost refers to the costs involved in the production of the product.
i)
Variable cost per unit of flat panel display is $235.
Total variable cost of flat panel display is $1,175,000
ii)
Calculate the markup percentage of flat panel display.
Hence, the markup percentage of flat panel display is 53.19%,
iii)
Calculate the selling price per unit of flat panel display
Cost per unit | $235 |
Markup per unit
|
$125 |
Selling price per unit | $360 |
Hence, the selling price per unit of flat panel display is $360.
e)
To Comment: On any other considerations that would influence the price of flat panel display.
e)
Explanation of Solution
Company CD should consider the following things before determining the price of flat panel display.
- The general price of flat panel displays in the market, the competitive price must be considered.
- The price should be revised in short run instead of fixing a price for long run.
f) i)
To Prepare: The differential analysis of Company CD, for the proposed offer to either accept or reject it.
f) i)
Explanation of Solution
Prepare the differential analysis for Company CD for the given alternatives.
Differential Analysis of Company CD | |||
Reject Order (Alt 1) or Accept Order (Alt 2) | |||
August 03 | |||
Reject Order (Alternative 1) | Accept Order (Alternative 1) | Differential Effect on income | |
Revenues | $0 | $180,000 | $180,000 |
Costs | |||
Variable |
$0 | (2) (-) $152,000 | (-) $152,000 |
Income (loss), per unit | $0 | $28,000 | $28,000 |
Table (1)
The differential analysis of Company CD shows a profit of $28,000 on accepting the offer, hence the offer should be accepted.
Working Note:
Calculate the variable manufacturing cost.
Want to see more full solutions like this?
Chapter 25 Solutions
Accounting
- Cost Classification, Income Statement Gateway Construction Company, run by Jack Gateway, employs 25 to 30 people as subcontractors for laying gas, water, and sewage pipelines. Most of Gateways work comes from contracts with city and state agencies in Nebraska. The companys sales volume averages 3 million, and profits vary between 0 and 10% of sales. Sales and profits have been somewhat below average for the past 3 years due to a recession and intense competition. Because of this competition, Jack constantly reviews the prices that other companies bid for jobs. When a bid is lost, he analyzes the reasons for the differences between his bid and that of his competitors and uses this information to increase the competitiveness of future bids. Jack believes that Gateways current accounting system is deficient. Currently, all expenses are simply deducted from revenues to arrive at operating income. No effort is made to distinguish among the costs of laying pipe, obtaining contracts, and administering the company. Yet all bids are based on the costs of laying pipe. With these thoughts in mind, Jack looked more carefully at the income statement for the previous year (see below). First, he noted that jobs were priced on the basis of equipment hours, with an average price of 165 per equipment hour. However, when it came to classifying and assigning costs, he needed some help. One thing that really puzzled him was how to classify his own 114,000 salary. About half of his time was spent in bidding and securing contracts, and the other half was spent in general administrative matters. Required: 1. Classify the costs in the income statement as (1) costs of laying pipe (production costs), (2) costs of securing contracts (selling costs), or (3) costs of general administration. For production costs, identify direct materials, direct labor, and overhead costs. The company never has significant work in process (most jobs are started and completed within a day). 2. Assume that a significant driver is equipment hours. Identify the expenses that would likely be traced to jobs using this driver. Explain why you feel these costs are traceable using equipment hours. What is the cost per equipment hour for these traceable costs?arrow_forwardProduct pricing and profit analysis with bottleneck operations Hercules Steel Company produces three grades of steel: high, good, and regular grade. Each of these products (grades) has high demand in the market, and Hercules is able to sell as much as it can produce of all three. The furnace operation is a bottleneck in the process and is running at 100% of capacity. Hercules wants to improve steel operation profitability. The variable conversion cost is 15 per process hour. The fixed cost is 200,000. In addition, the cost analyst was able to determine the following information about the three products: The furnace operation is part of the total process for each of these three products. Thus, for example, 4.0 of the 12.0 hours required to process High Grade steel are associated with the furnace. Instructions 1. Determine the unit contribution margin for each product. 2. Provide an analysis to determine the relative product profitability, assuming that the furnace is a bottleneck.arrow_forwardSales Needed to Earn Target Income Chillmax Company plans to sell 3,500 pairs of shoes at 60 each in the coming year. Variable cost is 35% of the sales price; contribution margin is 65% of the sales price. Total fixed cost equals 78,000 (includes fixed factory overhead and fixed selling and administrative expense). Required: 1. Calculate the sales revenue that Chillmax must make to earn operating income of 81,900 by using the point in sales equation. 2. Check your answer by preparing a contribution margin income statement based on the sales dollars calculated in Requirement 1.arrow_forward
- Cost-Volume-Profit, Margin of Safety Victoria Company produces a single product. Last years income statement is as follows: Required: 1. Compute the break-even point in units and sales dollars calculated using the break-even units. 2. What was the margin of safety for Victoria last year in sales dollars? 3. Suppose that Victoria is considering an investment in new technology that will increase fixed cost by 250,000 per year but will lower variable costs to 45% of sales. Units sold will remain unchanged. Prepare a budgeted income statement assuming that Victoria makes this investment. What is the new break-even point in sales dollars, assuming that the investment is made?arrow_forwardFinancial and Nonfinancial Aspects of Changing to JIT IntelliTalk manufactures smart phones. It is considering the implementation of a JIT system. Costs to reconfigure the production line will amount to 200,000 annually. Estimated benefits from the change to JIT are as follows: The quality advantages of JIT should reduce current rework cost of 300,000 by 25%. Materials storage, handling, and insurance costs of 250,000 would be reduced by an estimated 40%. Average inventory is expected to decline by 300,000 units, and the carrying cost per unit is .35. Required: 1. What is the estimated financial advantage or disadvantage of changing to a JIT system? 2. Are there any nonfinancial advantages or disadvantages of changing to a JIT system?arrow_forwardProduct cost method of product costing Smart Stream Inc. uses the product cost method of applying the cost-plus approach to product pricing. The costs of producing and selling 10,000 cell phones are as follows: Smart Stream desires a profit equal to a 30% return on invested assets of 1,200,000. A. Determine the amount of desired profit from the production and sale of 10,000 cell phones. B. Determine the product cost per unit for the production of 10,000 cell phones. C. Determine the product cost markup percentage for cell phones. D. Determine the selling price of cell phones.arrow_forward
- Mario Company is considering discontinuing a product. The costs of the product consist of $20,000 fixed costs and $15,000 variable costs. The variable operating expenses related to the product total $4,000. What is the differential cost? A. $19,000 B. $15,000 C. $35,000 D. $39,000arrow_forwardRoper Furniture manufactures office furniture and tracks cost data across their process. The following are some of the costs that they incur. Classify these costs as fixed or variable costs, and as product costs or period costs. Wood used to produce desks ($125,00 per desk) Production labor used to produce desks ($15 per hour) Production supervisor salary ($45,000 per year) Depreciation on factory equipment ($60,000 per year) Selling and administrative expenses ($45,000 per year) Rent on corporate office ($44,000 per year) Nails, glue, and other materials required to produce desks (varies per desk) Utilities expenses for production facility Sales staff commission (5% of gross sales)arrow_forwardDecision on accepting additional business A manager of Varden Sporting Goods Company is considering accepting an order from an overseas customer. This customer has requested an order for 20,000 dozen golf balls at a price of 22 per dozen. The variable cost to manufacture a dozen golf balls is 18 per dozen. The full cost is 25 per dozen. Varden has a normal selling price of 35 per dozen. Vardens plant has just enough excess capacity on the second shift to make the overseas order. What are some considerations in accepting or rejecting this order?arrow_forward
- Product Pricing using the Cost-Plus Approach Concepts; Differential Analysis for Accepting Additional Business Crystal Displays Inc. recently began production of a new product, flat panel displays, which required the investment of $1,620,000 in assets. The costs of producing and selling 8,100 units of flat panel displays are estimated as follows: Variable costs per unit: Fixed costs: Direct materials $81 Factory overhead $324,000 Direct labor 18 Selling and administrative expenses 162,000 Factory overhead 36 Selling and administrative expenses 32 Total $167 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 20% rate of return on invested assets. Required: Note: Round all markup percentages to two decimal places. Round all costs per unit and…arrow_forwardProduct Pricing using the Cost-Plus Approach Concepts; Differential Analysis for Accepting Additional Business Crystal Displays Inc. recently began production of a new product, flat panel displays, which required the investment of $1,620,000 in assets. The costs of producing and selling 8,100 units of flat panel displays are estimated as follows: Variable costs per unit: Fixed costs: Direct materials $81 Factory overhead $324,000 Direct labor 18 Selling and administrative expenses 162,000 Factory overhead 36 Selling and administrative expenses 32 Total $167 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 20% rate of return on invested assets. Required: Question Content Area Note: Round all markup percentages to two decimal places. Round all…arrow_forwardProduct pricing using cost plus Approach methods; Different analysis for accepting additional business Niht 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: Variables costs per unit: fixed costs: Direct materials $32 Factory overhead $180,000 Direct labor 12 Selling and administration expenses80,000 Factory overhead 8 Selling and administration 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 percentage to two decimal places, if required. Round all costs per unit and…arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax CollegeManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
- Principles of Cost AccountingAccountingISBN:9781305087408Author:Edward J. Vanderbeck, Maria R. MitchellPublisher:Cengage LearningCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning