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	29.00
4	Factory overhead	52.00
5	Selling and administrative expenses	35.00
6	Total variable cost per unit	$238.00
7	Fixed costs:
8	Factory overhead	$247,000.00
9	Selling and administrative expenses	149,000.00

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 10% 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 method 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 method is used, determine (a) the cost amount per unit, (b) the markup percentage and (c) the selling price of flat panel displays.*
4.	(Appendix) Assuming that the variable cost method is used, determine (a) the cost amount per unit, (b) the markup percentage, 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 method. On August 3, Crystal Displays Inc. received an offer from Maple Leaf Visual Inc. for 600 units of flat panel displays at $224 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? *Round your markup percentage and selling price to two decimal places.

LabelsCash flows from operating activitiesCostsAmount DescriptionsCash payments for merchandiseCash received from customersFixed manufacturing costsIncome (loss)RevenuesVariable manufacturing costs

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

2. Assuming that the product cost method is used, determine (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of flat panel displays. Round your markup percentage and selling price to two decimal places.

Cost amount per unit
Markup percentage	%
Selling price

3. (Appendix) Assuming that the total cost method is used, determine (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of flat panel displays. Round your markup percentage and selling price to two decimal places.

Cost amount per unit
Markup percentage	%
Selling price

4. (Appendix) Assuming that the variable cost method is used, determine (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of flat panel displays. Round your markup percentage and selling price to two decimal places.

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 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.

6a. 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 (Alternative 1) or Accept (Alternative 2) Order

August 3

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

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

Yes

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

No

Answer 1

1. The amount of desired profit from the production and sale of flat panel displays .$ 150,000 being 10% of investment at a 5000 unit level of sales and production. 2. a. Product cost per unit excluding S& D Costs: $287.4 2 b. Markup Percentage 20.81 % 2c. Selling price per unit $347.20 3a. Total Cost per Unit $ 317.20 3b. Markup percentage 9.46% 3c. Selling price per unit $347.20 4a. Variable cost per unit $ 238 4b. Markup required to earn return on investment and cover fixed costs at 5000 unit level 45.88% of cost 4c Selling price per unit $ 347.20 5. Capacity costs may be stepped. 6. Maple Leaf offer should be rejected as the administrative and selling expenses are sunk and are of a period nature and do not vary. The total costs of production will not vary for the final 2000 units as the selling and administrative costs are fixed. The contract implies no additional costs but does not absolve the company from meeting its fixed commitments. Total costs will be $1586000 and the total revenues will be $ 1085800 which will result in a net loss of $ 500200 1 Reject Order Accept Order Differential Effect on Income 2 (Alternative 1) (Alternative 2) (Alternative 2) 3 $150000 Profit $500200 loss $650200 adverse effect