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 $600,000 in assets. The costs of producing and selling 10,000 halogen lights are estimated as follows:
Variable costs per unit: Fixed costs:
Direct materials $32 Factory overhead $180,000
Direct labor 12 Selling and administrative expenses 80,000
Factory overhead 8
Selling and administrative expenses 7
Total variable cost per unit $59
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% 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 the halogen light.
$
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 the price of competing products and general economic conditions of the marketplace , could lead management to establish a different short-run price.
Feedback
1. Multiply the desired profit percentage by the desired amount (invested assets).
2.
a. Divide the total manufacturing costs (direct labor, direct materials, and Factory overhead) by the number of units produced.
b. Divide the desired profit plus total selling and administrative expenses by the total manufacturing costs.
c. Add total cost per unit (a) and markup per unit [(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 total cost per unit (a) and markup per unit [(a) x (b)].
4.
a. Multiply the variable cost amount per unit by the number of units.
b. Divide the desired profit plus the total fixed costs by the total variable costs.
c. Add total cost per unit (a) and markup per unit [(a) x (b)].
5. What other factors influence pricing decisions?
Learning Objective 1 and Learning Objective 2.
6. Assume that as of September 1, 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 method. 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 "0".
Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
September 5
Reject Order (Alternative 1) Accept Order (Alternative 2) Differential Effect on Income (Alternative 2)
Revenues $ $ $
Costs
Variable manufacturing costs
Income (Loss) $ $ $
Feedback
6. a. Subtract the additional variable manufacturing costs from the additional revenues. Determine the differential effect on income of the revenues, costs, and income (loss).
Learning Objective 1 and Learning Objective 2.
b. Based on the differential analysis in part (a), should the proposal be accepted?
Yes