Chapter 25, Problem 25.5BPR

a)

To determine

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.

$\text{Product Cost per unit = }\frac{\text{Total Product Cost}}{\text{Estimated Units Produced and sold}}$

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.

$\text{Markup Percentage = }\frac{\left(\begin{array}{l}\text{Desired}\\ \text{Profit}\end{array}\right)\text{ + }\left(\begin{array}{l}\text{Total Selling and}\\ \text{Admininstrative Expenses}\end{array}\right)}{\text{Total Product Cost}}$

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 NG.

Explanation of Solution

Desired Profit: Company NG aims at earning a profit of 10% of the total investment made of $600,000.

Calculate the desired profit of Company NG.

$\begin{array}{c}\text{Desired profit = 10\% of Invested assets}\\ \text{= \$600,000 × 10\%}\\ \text{= \$600,000 × }\frac{\text{10}}{\text{100}}\\ \text{= \$60,000}\end{array}$

Hence, the desired profit of Company NG is $60,000.

b)

To determine

On the basis of product cost concept, for Company NG

1. i. Cost per unit
2. ii. Markup percentage
3. iii. Selling price of halogen lights

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 halogen light.

Variable Cost (1)	$520,000
Fixed Cost	$180,000
Total	$700,000
Divide by: Number of units	10,000
Cost per unit	$70

Hence, the cost per unit of halogen light is $70.

Working Note:

Calculate the variable cost.

$\begin{array}{c}\text{Varaible Cost=}\left(\begin{array}{c}\text{Direct Materials+Direct Labor}\\ \text{+Factory <x-custom-btb-me data-me-id="2268" class="microExplainerHighlight">Overhead</x-custom-btb-me>}\end{array}\right)\text{ ×10,000 units}\\ \text{=}\left(\text{\$32+\$12+\$8}\right)\text{ ×10,000 units}\\ \text{= \$52 ×10,000 units}\\ \text{= \$520,000}\end{array}$ (1)

ii)

Calculate the markup percentage of halogen light.

$\begin{array}{c}\text{Markup Percentage = }\frac{\left(\begin{array}{l}\text{Desired}\\ \text{Profit}\end{array}\right)\text{ + }\left(\begin{array}{l}\text{Total Selling and}\\ \text{Admininstrative Expenses}\end{array}\right)}{\text{Total Product Cost}}\\ \text{= }\frac{\text{\$60,000 + \$80,000+ }\left(\text{\$7×10,000 units}\right)}{\text{\$520,000 + \$180,000}}\\ \text{= }\frac{\text{\$140,000+\$70,000}}{\text{\$700,000}}\\ \text{= }\frac{\text{\$210,000}}{\text{\$700,000}}\\ \text{= 30\%}\end{array}$

Hence, the markup percentage of halogen light is 30%,

iii)

Calculate the selling price per unit of halogen light

Cost per unit	$70
Markup per unit $\left(\text{\$}70\times 30\text{\%}\right)$	$21
Selling price per unit	$91

Hence, the selling price per unit of halogen light is $91.

c)

To determine

On the basis of total cost concept, for Company NG

1. i. Cost per unit
2. ii. Markup percentage
3. iii. Selling price of halogen lights

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 halogen light.

Variable Cost $\left(\$59 \times 10,000 units\right)$	$590,000
Fixed Cost $\left(\$180,000+\$80,000\right)$	$260,000
Total	$850,000
Divide by: Number of units	10,000
Cost per unit	$85

Hence, the cost per unit of halogen light is $85.

ii)

Calculate the markup percentage of halogen light (rounded).

$\begin{array}{c}\text{Markup Percentage = }\frac{\text{Desired Profit}}{\text{Total Costs}}\\ \text{= }\frac{\text{\$60,000}}{\text{\$850,000}}\\ \text{= 7}\text{.06\% }\left(\text{rounded}\right)\end{array}$

Hence, the markup percentage of halogen light, rounded o 2 places is 7.06%,

iii)

Calculate the selling price per unit of halogen light

Cost per unit	$85
Markup per unit $\left(\text{\$}85\times 7.06\text{\%}\right)$	$6
Selling price per unit	$91

Hence, the selling price per unit of halogen light is $91.

d)

To determine

On the basis of variable cost concept, for Company NG

1. i. Cost per unit
2. ii. Markup percentage
3. iii. Selling price of halogen lights

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 halogen light is $59.

Total variable cost of halogen light is $590,000 $\left(\text{\$}59\times 10,000\text{ units}\right)$

ii)

Calculate the markup percentage of halogen light.

$\begin{array}{c}\text{Markup Percentage = }\frac{\left(\begin{array}{l}\text{Desired}\\ \text{Profit}\end{array}\right)\text{ + }\left(\text{Total Fixed Costs}\right)}{\text{Total Variable Cost}}\\ \text{= }\frac{\text{\$60,000 + \$180,000+ \$80,000}}{\text{\$590,000}}\\ \text{= }\frac{\text{\$320,000}}{\text{\$590,000}}\\ \text{= 54}\text{.24\%}\end{array}$

Hence, the markup percentage of halogen light is 54.24%,

iii)

Calculate the selling price per unit of halogen light

Cost per unit	$59
Markup per unit $\left(\text{\$}235\times 53.19\text{\%}\right)$	$32
Selling price per unit	$91

Hence, the selling price per unit of halogen light is $91.

e)

To determine

To Comment: On any other considerations that would influence the price of halogen light.

Explanation of Solution

Company NG should consider the following things before determining the price of halogen light.

• The general price of halogen lights 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 determine

To Prepare: The differential analysis of Company NG, for the proposed offer to either accept or reject it.

Explanation of Solution

Prepare the differential analysis for Company NG for the given alternatives.

Differential Analysis of Company NG
Reject Order (Alt 1) or Accept Order (Alt 2)
September 05
	Reject Order (Alternative 1)	Accept Order (Alternative 1)	Differential Effect on income
Revenues	$0	(2)        $91,200	$91,200
Costs
Variable Manufacturing Costs	$0	(3)  (-)  $83,200	(-)   $83,200
Income (loss), per unit	$0	$8,000	$8,000

Table (1)

The differential analysis of Company NG shows a profit of $8,000 on accepting the offer, hence the offer should be accepted.

Working Note:

Calculate the revenue from the sale of the halogen lights.

$\begin{array}{c}\text{Revenue= Selling price × 1,600 units}\\ \text{= }\$57\text{ ×1,600 units}\\ \text{= \$91,200}\end{array}$ (2)

Calculate the variable manufacture cost.

$\begin{array}{c}\text{Varaible Manufacturing Cost=}\left(\begin{array}{l}\text{Offer price }-\text{ Selling and}\\ \text{Administrative Expenses}\end{array}\right)\text{ ×1,600 units}\\ \text{=}\left(\text{\$59 }-\text{\$7}\right)\text{ ×1,600 units}\\ \text{= \$52 ×1,600 units}\\ \text{= \$83,200}\end{array}$ (3)