Product Pricing using the Cost-Plus Approach Concepts; Differential Analysis for
ID: 2475722 • Letter: P
Question
Product Pricing using the Cost-Plus Approach Concepts; Differential Analysis for Accepting Additional Business
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 10% rate of return on invested assets.
Required:
Note: Round all markup percentages to two decimal places, if required.
1. Determine the amount of desired profit from the production and sale of the halogen light.
$
2. Assuming that the product cost concept is used, determine the following:
The cost amount per unit.
The markup percentage.
The selling price of the halogen light.
3. Appendix Assuming that the total cost concept is used, determine the following:
The cost amount per unit.
The markup percentage.
The selling price of the halogen light (rounded to nearest whole dollar).
4. Appendix Assuming that the variable cost concept is used, determine the following:
The cost amount per unit.
The markup percentage.
The selling price of the halogen light (rounded to nearest whole dollar).
5. The cost-plus approach price of $91 Selectshouldshould notCorrect 11 of Item 1 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, SelectcouldwillCorrect 12 of Item 1 lead management to establish a short-run price more or less than $91.
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1. Multiply the desired profit percentage by the desired amount (invested assets).
2.
a. Divide the total manufacturing costs (direct labor, direct materials, and overhead) by the number of units produced.
b. Divide the desired profit plus the selling and administrative expenses by the total manufacturing costs.
c. Add cost (a) and mark-up [(a) x (b)].
3.
a. Divide all variable and fixed costs by the number of units produced.
b. Divide the desired profit by the total costs.
c. Add cost (a) and mark-up [(a) x (b)].
4.
a. Multiply the variable cost per unit by the number of units.
b. Divide the desired profit plus the total fixed costs by the total variable costs.
c. Add cost (a) and mark-up [(a) x (b)].
5. What other factors influence pricing decisions?
Learning Objective 1, Learning Objective 2, and Learning Objective 5.
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Solution
6. Assume that as of September 1, 2014, 7,000 units of halogen light have been produced and sold during the current year. Analysis of the domestic market indicates that 3,000 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 concept. On September 5, Night Glow Inc. received an offer from Tokyo Lighting Inc. for 1,600 units of the halogen light at $57 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 Tokyo Lighting Inc. If an amount is zero, enter zero "0".
Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
September 5, 2014
Reject Order (Alternative 1)
Accept Order (Alternative 2)
Differential Effect on Income (Alternative 2)
Revenues
Correct 8 of Item 2
Correct 9 of Item 2
Correct 10 of Item 2
Costs
Variable manufacturing costs
Correct 13 of Item 2
Correct 14 of Item 2
Correct 15 of Item 2
Income (Loss)
Correct 17 of Item 2
Correct 18 of Item 2
Correct 19 of Item 2
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6. a. Follow Example Exercise 24-6. Subtract the additional costs from the additional revenues. Determine the differential effect on income of the revenues, costs, and income (loss).
Learning Objective 1, Learning Objective 2, and Learning Objective 5.
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Solution
b. Based on the differential analysis in part (a), should the proposal be accepted?
SelectYesNoCorrect 1 of Item 3
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6. b. Which alternative has the most desirable effect on income?
Learning Objective 1, Learning Objective 2, and Learning Objective 5.
a. Cost amount per unit $ b. Markup percentage % c. Selling price per unit $Explanation / Answer
1
Calculation of the amount of desired profit from the production and sale of the halogen light:
Invested assets
600000
Required return on Investments
10%
Amount of desired profit = 600000*10% =
$60,000
2
Calcualtion of cost amount per unit:
(Product cost concept)
Direct Material per unit
$ 32.00
Direct Labor per unit
$ 12.00
Variable factory Overhead per unit
$ 8.00
Fixed factory Overhead per unit (180000/10000)
$ 18.00
Cost Amount per unit
$ 70.00
3
Calcualtion of Markup %:
(Product cost concept)
Amount of desired profit per unit = 60000 / 10000 =
$ 6
Cost Amount per unit
$ 70.00
Markup % = 6/70 =
8.57%
4
Calcualtion of Selling Price per unit:
(Product cost concept)
Cost Amount per unit
$ 70.00
Add: Markup
$ 6.00
Selling Price per unit
$ 76.00
1
Calculation of the amount of desired profit from the production and sale of the halogen light:
Invested assets
600000
Required return on Investments
10%
Amount of desired profit = 600000*10% =
$60,000
2
Calcualtion of cost amount per unit:
(Product cost concept)
Direct Material per unit
$ 32.00
Direct Labor per unit
$ 12.00
Variable factory Overhead per unit
$ 8.00
Fixed factory Overhead per unit (180000/10000)
$ 18.00
Cost Amount per unit
$ 70.00
3
Calcualtion of Markup %:
(Product cost concept)
Amount of desired profit per unit = 60000 / 10000 =
$ 6
Cost Amount per unit
$ 70.00
Markup % = 6/70 =
8.57%
4
Calcualtion of Selling Price per unit:
(Product cost concept)
Cost Amount per unit
$ 70.00
Add: Markup
$ 6.00
Selling Price per unit
$ 76.00
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