Crystal Displays Inc. recently began production of a new product, flat panel displays, which required the investment of $1,500,000 in assets. The costs of producing and selling 5,000 units of flat panel displays are estimated as follows:
Question not attempted.
1 Variable costs per unit:
2 Direct materials $120.00
3 Direct labor 30.00
4 Factory overhead 50.00
5 Selling and administrative expenses 35.00
6 Total $235.00
7 Fixed costs:
8 Factory overhead $250,000.00
9 Selling and administrative expenses150,000.00
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 15% rate of 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 concept
A concept used in applying the cost-plus approach to product pricing in which only the costs of manufacturing the product, termed the product cost, are included in the cost amount to which the markup is added.
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 concept
A concept used in applying the cost-plus approach to product pricing in which all the costs of manufacturing the product plus the selling and administrative expenses are included in the cost amount to which the markup is added.
is used, determine (a) the cost amount per unit, (b) the markup percentage (rounded to two decimal places), and (c) the selling price of flat panel displays (rounded to nearest whole dollar).
4. (Appendix) Assuming that the variable cost concept
A concept used in applying the cost-plus approach to product pricing in which only the variable costs are included in the cost amount to which the markup is added.
is used, determine (a) the cost amount per unit, (b) the markup percentage (rounded to two decimal places), and (c) the selling price of flat panel displays (rounded to nearest whole dollar).
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 concept. On August 3, Crystal Displays Inc. received an offer from Maple Leaf Visual Inc. for 800 units of flat panel displays at $225 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?

- Market competition. Is Crystal Displays a price-taker in the market for flat panel displays? The market demand and supply will also influence the selling price.

6. Differential Analysis:

Sales revenue $450,000 ($225*2,000)

Product cost 500,000 ($250*2,000)

Loss incurred = ($50,000)

B. The proposal should not be accepted. The cost of production is higher than the special proposal's offered price.

Explanation:

a) Data and Calculations:

Investment in assets = $1,500,000

Production and sales units = 5,000

1 Variable costs per unit:

2 Direct materials $120

3 Direct labor 30

4 Factory overhead 50

5 Selling and administrative expenses 35

6 Total $235

7 Fixed costs:

8 Factory overhead $250,000

9 Selling and administrative expenses 150,000

Required rate of return = 15%

Returns on invested assets = $225,000 ($1,500,000 * 15%)

Product cost per unit:

1 Variable costs per unit:

2 Direct materials $120

3 Direct labor 30

4 Factory overhead 50

Total variable cost $200 * 5,000 = $1,000,000

8 Factory overhead $250,000

Total production cost = $1,250,000

Returns on invested assets = $225,000

Expected Sales Revenue = $1,475,000

Production and sales units = 5,000

Cost per unit = $250 ($1,250,000/5,000)

Mark-up percentage = $225,000/$1,250,000 * 100 = 18%

Selling price = $295 ($250 * 1.18)

Total cost of production, selling, and administration:

Total variable cost = $1,175,000 ($235 * 5,000)

Total fixed costs = 400,000 ($250,000 + $150,000)

Total costs $1,575,000

Production and sales units = 5,000

Cost per unit = $315 ($1,575,000/5,000)

Total production, selling and admin. cost = $1,575,000

Returns on invested assets = $225,000

Expected Sales Revenue = $1,800,000

Mark-up percentage = $225,000/$1,575,000 * 100 = 14.29%

Variable cost concept:

Total variable cost = $1,175,000 ($235 * 5,000)

Returns on invested assets = 225,000

Total variable cost + markup =$1,400,000

Cost per unit = $235

Mark-up percentage = $225,000/$1,175,000 * 100 = 19%

Selling price = $280 ($1,400,000/5,000)