Product Pricing using the Cost-Plus Approach Methods; Differential Analysis for
ID: 2432998 • Letter: P
Question
Product Pricing using the Cost-Plus Approach Methods; Differential Analysis for Accepting Additional Business
Night Glow Inc. recently began production of a new product, the halogen light, which required the investment of $2,160,000 in assets. The costs of producing and selling 10,800 halogen lights are estimated as follows:
Night Glow Inc. is currently considering establishing a selling price for the halogen light. The president of Night Glow Inc. has decided to use the cost-plus approach to product pricing and has indicated that the halogen light must earn a 20% 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 halogen lights.
$
2. Assuming that the product cost method is used, determine the following:
3. (Appendix) Assuming that the total cost method is used, determine the following:
4. (Appendix) Assuming that the variable cost method is used, determine the following:
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 September 1, 6,000 units of halogen light have been produced and sold during the current year. Analysis of the domestic market indicates that 4,800 additional units of the halogen light are expected to be sold during the remainder of the year at the normal product price determined under the product cost method. On September 5, Night Glow Inc. received an offer from Tokyo Lighting Inc. for 1,800 units of the halogen light at $270.00 each. Tokyo Lighting Inc. will market the units in Japan under its own brand name, and no variable selling and administrative expenses associated with the sale will be incurred by Night Glow Inc. The additional business is not expected to affect the domestic sales of the halogen light, and the additional units could be produced using existing productive, selling, and administrative capacity.
a. Prepare a differential analysis of the proposed sale to Video Systems Inc. If an amount is zero, enter "0".
b. Based on the differential analysis in part (a), should the proposal be accepted?
Explanation / Answer
Solution 1:
Amount of desired profit from the production and sale of halogen lights = Invested amount * Desired rate of return = $2,160,000 * 20% = $432,000
Solution 2:
Product cost per unit = Variable manufacturing cost per unit + Fixed manufacturing cost per unit
= $108 + $23 + $49 + ($432,000/10800) = $220 per unit
Total product cost = $220 * 10800 = $2,376,000
Required margin to cover selling expenses and profit = ($42*10800 + 216000) + $432,000 = $1,101,600
Markup percentage = $1,101,600 / $2,376,000 = 46.36%
Selling price per unit = ($2,376,000 + $1,101,600) / 10800 = $322
Solution 3:
Total cost per unit = Product cost per unit + Selling cost per unit
= $220 + $42 + ($216,000 /10800) = $282 per unit
Total cost for 10800 units = 10800 * $282 =$3,045,600
Required profit = $432,000
Markup percentage over total cost = $432,000 / $3,045,600 = 14.18%
Desired selling price per unit = ($3,045,600 + $432,000) /10800 = $322 per unit
Solution 4:
variable cost per unit = $222 per unit
Total variable costs = $222 * 10800 = $2,397,600
Required margin to cover fixed expenses and profit = $432,000 + $216,000 + $432,000 = $1,080,000
Required markup on variable cost = $1,080,000 / $2,397,600 = 45.04%
Selling price per unit = ($2,397,600 + $1,080,000) / 10,800 = $322 per unit
Note: I have answered first 4 parts of the question as per chegg policy, kindly post separate question for answer of remaining parts.
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