Product Pricing using the Cost-Plus Approach Concepts; Differential Analysis for

Question

Product Pricing using the Cost-Plus Approach Concepts; Differential Analysis for Accepting Additional Business

Display Labs Inc. is currently considering establishing a selling price for flat panel displays. The president of Display Labs has decided to use the cost-plus approach to product pricing and has indicated that the displays must earn a 20% rate of return on invested assets.

Differential Analysis Reject Order (Alt. 1) or Accept Order (Alt. 2) August 3, 2012 Reject Order (Alternative 1) Accept Order (Alternative 2) Differential Effect on Income (Alternative 2) Revenues $ $ $ Costs: Variable manufacturing costs Income (Loss) $ $ $

Explanation / Answer

Part 1:

Amount of desired profit = .20 * 1800000 = 360000

Part 2:

Product Cost Amount Per Unit = 90 + 20 + 40 = 150 + 360000/9000 = 190 per unit.

Markup % = (360000 + 180000 + 35*9000)/(190*9000)*100 = 50%.

Selling Price = 150*(1+.50) = 225 per unit.

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