Question

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:

1	Variable costs per unit:
2	Direct materials	$122.00
3	Direct labor	28.00
4	Factory overhead	48.00
5	Selling and administrative expenses	34.00
6	Total	$232.00
7	Fixed costs:
8	Factory overhead	$245,000.00
9	Selling and administrative expenses	148,000.00

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 13% 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 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.

3.

(Appendix) Assuming that the total cost concept 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.

4.

(Appendix) Assuming that the variable cost concept 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.

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 1,000 units of flat panel displays at $220 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?

Labels and Amount Descriptions

Labels
Cash flows from operating activities
Costs
Amount Descriptions
Cash payments for merchandise
Cash received from customers
Fixed manufacturing costs
Income (Loss), per unit
Revenues
Variable manufacturing costs

Starting Questions

1. Determine the amount of desired profit from the production and sale of flat panel displays.

2. Assuming that the product cost concept 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.

Cost amount per unit
Markup percentage	%
Selling price

3. (Appendix) Assuming that the total cost concept 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.

Cost amount per unit
Markup percentage	%
Selling price

4. (Appendix) Assuming that the variable cost concept 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.

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 of $360 be viewed as a general guideline for establishing long-run normal prices. Other considerations, such as the price of competing products and general economic conditions of the marketplace, lead management to establish a short-run price more or less than $360.

Differential Analysis

6. 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.

Differential Analysis

Reject Order (Alternative 1) or Accept Order (Alternative 2)

August 3

1		Reject Order	Accept Order	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3
4
5
6

Final Question

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

Yes

No

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

Answer 1

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1. Determine the amount of desired profit from the production and sale of flat panel displays.
Desired Profit is 13% of invested assets		Total	Per Unit
Hence, Desired Profit	1500000*13%	195000	195000/5000=39
2. Product Cost Concept
Cost amount per unit
Variable cost (only manufacturing)	(122+28+48)	198	Per Unit
Fixed Overhead	245000/5000	49	Per Unit
Cost amount per unit		247
Mark up Percentage
Profit per unit		39
Cost per unit		247
Mark up (Profit/Cost)	39/247	15.79
Selling Price
Cost per unit		247
add: Profit per unit		39
Selling Price		286
3. Total Cost Concept
Cost amount per unit
Total Variable cost	(122+28+48+34)	232	Per Unit
Total Fixed Cost	(245000+148000)/5000	78.6	Per Unit
Cost amount per unit		310.6
Mark up Percentage
Profit per unit		39
Cost per unit		310.6
Mark up (Profit/Cost)	39/310.6	12.56
Selling Price
Cost per unit		310.6
add: Profit per unit		39
Selling Price		349.6
4. Variable Cost Concept
Cost amount per unit
Total Variable cost	(122+28+48+34)	232	Per Unit
			Per Unit
Cost amount per unit		232
Mark up Percentage
Profit per unit		39
Cost per unit		232
Mark up (Profit/Cost)	39/232	16.81
Selling Price
Cost per unit		232
add: Profit per unit		39
Selling Price		271
5. Additional Consideration
1. What price competition offering
2. Product Life Cycle
6. Decision
	Per Unit	Units	Total
Incremental sales	220	1000	220000
Variable Product Cost	(122+28+48)=198	1000	198000
Incremental Profit			22000
Since proposal is giving additional profit of 22000, should be accepted