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:

Variable costs per unit:			Fixed costs:
Direct materials	$120		Factory overhead	$250,000
Direct labor	30		Selling and administrative expenses	150,000
Factory overhead	50
Selling and administrative expenses	35
Total variable cost per unit	$235

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% return on invested assets.

Required:

Note: Round all markup percentages to two decimal places, if required. Round all costs per unit and selling prices per unit to the nearest whole dollar.

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 the following:

a. Product cost amount per unit	$
b. Markup percentage		%
c. Selling price per unit	$

3. (Appendix) Assuming that the total cost method is used, determine the following:

a. Total cost amount per unit	$
b. Markup percentage		%
c. Selling price per unit	$

4. (Appendix) Assuming that the variable cost method is used, determine the following:

a. Variable cost amount per unit	$
b. Markup percentage		%
c. Selling price per unit	$

5. 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.

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 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. If an amount is zero, enter "0".

Differential Analysis
Reject (Alt. 1) or Accept (Alt. 2) Order
August 3
	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$	$	$
Costs
Variable manufacturing costs
Profit (loss)	$	$	$

Answer 1

ANSWER

1. Desired profit = 15% x $1500000 = $225000

2. Product cost method:

Direct materials	120.00
Direct labor	30.00
Variable factory overhead	50.00
Fixed factory overhead ($250000/5000)	50.00
Cost amount per unit $	250.00

Markup per unit = $35 + [($225000 + $150000)/5000] = $35 + $75 = $110

Markup percentage = $110/$250 = 44.00%

Selling price = $250 + $110 = $360.00

3. Total cost method:

Direct materials	120.00
Direct labor	30.00
Variable factory overhead	50.00
Fixed factory overhead ($250000/5000)	50.00
Variable selling and administrative expenses	35.00
Fixed selling and administrative expenses ($150000/5000)	30.00
Cost amount per unit $	315.00

Markup = $225000/5000 = $45

Markup percentage = $45/$315 = 14.29%

Selling price = $315 + $45 = $360.00

4. Variable cost method:

Cost amount per unit = $235.00

Markup = ($225000 + $250000 + $150000)/5000] = $625000/5000 = $125

Markup percentage = $125/$235 = 53.19%

Selling price = $235 + $125 = $360.00