Concept explainers
1.
Product pricing: Product pricing is the method used for fixing the price for the products sold or the services offered to the consumers.
Product cost pricing: Product cost pricing is a pricing technique which sums up the costs involved in the production of the product alone and the markup is added to the sum.
Total cost pricing: Total cost pricing is a pricing technique which sums up all the costs involved in the production of the product and the markup is added to the sum.
Total Variable Cost: Total variable cost refers to the costs involved in the production of the product.
Markup Percentage: The markup percentage is the percentage of additional costs added to the product cost to get the selling price of the product.
Selling Price: Selling price is calculated by summing up the product cost per unit and the per unit markup cost
The desired profit of Company NG.
1.
Explanation of Solution
Desired Profit: Company NG aims at earning a profit of 10% of the total investment made of $600,000.
Calculate the desired profit of Company NG.
Hence, the desired profit of Company NG is $60,000.
2. a
Determine the cost amount per unit for Company NG on the basis of product cost concept.
2. a
Explanation of Solution
Product cost pricing: Product cost pricing is a pricing technique which sums up the costs involved in the production of the product alone and the markup is added to the sum.
Calculate the cost per unit of halogen light.
Variable Cost (1) | $520,000 |
Fixed Cost | $180,000 |
Total | $700,000 |
Divide by: Number of units | 10,000 |
Cost per unit | $70 |
Hence, the cost per unit of halogen light is $70.
Working Note:
Calculate the variable cost.
2. b
Determine the markup percentage for Company NG on the basis of product cost concept.
2. b
Explanation of Solution
Calculate the markup percentage of halogen light.
Hence, the markup percentage of halogen light is 30%,
2. c
Determine the selling price per unit for Company NG on the basis of product cost concept.
2. c
Explanation of Solution
Calculate the selling price per unit of halogen light.
Cost per unit | $70 |
Markup per unit | $21 |
Selling price per unit | $91 |
Hence, the selling price per unit of halogen light is $91.
3. a
Determine the cost amount per unit for Company NG on the basis of total cost method.
3. a
Explanation of Solution
Total cost pricing: Total cost pricing is a pricing technique which sums up all the costs involved in the production of the product and the markup is added to the sum.
Calculate the cost per unit of halogen light.
Variable Cost | $590,000 |
Fixed Cost | $260,000 |
Total | $850,000 |
Divide by: Number of units | 10,000 |
Cost per unit | $85 |
Hence, the cost per unit of halogen light is $85.
3. b
Determine the markup percentage for Company NG on the basis of total cost method.
3. b
Explanation of Solution
Calculate the markup percentage of halogen light (rounded).
Hence, the markup percentage of halogen light, rounded o 2 places is 7.06%,
3. c
Determine the selling price per unit for Company NG on the basis of total cost method.
3. c
Explanation of Solution
Calculate the selling price per unit of halogen light
Cost per unit | $85 |
Markup per unit | $6 |
Selling price per unit | $91 |
Hence, the selling price per unit of halogen light is $91.
4 . a
Determine the cost amount per unit for Company NG on the basis of variable cost concept.
4 . a
Explanation of Solution
Total Variable Cost: Total variable cost refers to the costs involved in the production of the product.
Variable cost per unit of halogen light is $59.
Total variable cost of halogen light is $590,000
4. b
Determine the markup percentage for Company NG on the basis of variable cost concept.
4. b
Explanation of Solution
Calculate the markup percentage of halogen light.
Hence, the markup percentage of halogen light is 54.24%,
4. c
Determine the selling price per unit for Company NG on the basis of variable cost concept.
4. c
Explanation of Solution
Calculate the selling price per unit of halogen light
Cost per unit | $59 |
Markup per unit | $32 |
Selling price per unit | $91 |
Hence, the selling price per unit of halogen light is $91.
5.
Comment on any other considerations that would influence the price of halogen light.
5.
Explanation of Solution
Company NG should consider the following things before determining the price of halogen light.
- • The general price of halogen lights in the market, the competitive price must be considered.
- • The price should be revised in short run instead of fixing a price for long run.
6. a
Prepare the differential analysis of Company NG, for the proposed offer to either accept or reject it.
6. a
Explanation of Solution
Prepare the differential analysis for Company NG for the given alternatives.
Differential Analysis of Company NG | |||
Reject Order (Alt 1) or Accept Order (Alt 2) | |||
September 05 | |||
Reject Order (Alternative 1) | Accept Order (Alternative 1) | Differential Effect on income | |
Revenues | $0 | (2) $91,200 | $91,200 |
Costs | |||
Variable | $0 | (3) (-) $83,200 | (-) $83,200 |
Income (loss), per unit | $0 | $8,000 | $8,000 |
Table (1)
The differential analysis of Company NG shows a profit of $8,000 on accepting the offer, hence the offer should be accepted.
Working Note:
Calculate the revenue from the sale of the halogen lights.
Calculate the variable manufacture cost.
6. b.
Explain whether on the basis of differential analysis of Company NG, the proposed offer should be accepted or not.
6. b.
Explanation of Solution
The differential analysis of Company NG shows a profit of $8,000 on accepting the offer. If the offer is not accepted the Company NG may not be able to generate the revenue of $8,000; hence the offer should be accepted
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Chapter 11 Solutions
Managerial Accounting
- Product pricing using the cost-plus approach methods; differential analysis for accepting additional business 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: 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. Instructions 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 (A) the cost amount per unit, (B) the markup percentage, and (C) the selling price of flat panel displays. 3. (Appendix) Assuming that the total cost method is used, determine (A) the cost amount per unit, (B) the markup percentage (rounded to two decimal places), and (C) the selling price of flat panel displays. (Round markup to nearest whole dollar.) 4. (Appendix) Assuming that the variable cost method is used, determine (A) the cost amount per unit, (B) the markup percentage (rounded to two decimal places), and (C) the selling price of flat panel displays. (Round markup to nearest whole dollar.) 5. Comment on any additional considerations that could influence establishing the selling price for flat panel displays. 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. B. Based on the differential analysis in part (A), should the proposal be accepted?arrow_forwardFinancial and Nonfinancial Aspects of Changing to JIT IntelliTalk manufactures smart phones. It is considering the implementation of a JIT system. Costs to reconfigure the production line will amount to 200,000 annually. Estimated benefits from the change to JIT are as follows: The quality advantages of JIT should reduce current rework cost of 300,000 by 25%. Materials storage, handling, and insurance costs of 250,000 would be reduced by an estimated 40%. Average inventory is expected to decline by 300,000 units, and the carrying cost per unit is .35. Required: 1. What is the estimated financial advantage or disadvantage of changing to a JIT system? 2. Are there any nonfinancial advantages or disadvantages of changing to a JIT system?arrow_forwardSouthland Corporation’s decision to produce a new line of recreational products resulted in the need to construct either a small plant or a large plant. The best selection of plant size depends on how the marketplace reacts to the new product line. To conduct an analysis, marketing management has decided to view the possible long-run demand as low, medium, or high. The following payoff table shows the projected profit in millions of dollars: What is the decision to be made, and what is the chance event for Southland’s problem? Construct a decision tree. Recommend a decision based on the use of the optimistic, conservative, and minimax regret approaches.arrow_forward
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With these thoughts in mind, Jack looked more carefully at the income statement for the previous year (see below). First, he noted that jobs were priced on the basis of equipment hours, with an average price of 165 per equipment hour. However, when it came to classifying and assigning costs, he needed some help. One thing that really puzzled him was how to classify his own 114,000 salary. About half of his time was spent in bidding and securing contracts, and the other half was spent in general administrative matters. Required: 1. Classify the costs in the income statement as (1) costs of laying pipe (production costs), (2) costs of securing contracts (selling costs), or (3) costs of general administration. For production costs, identify direct materials, direct labor, and overhead costs. The company never has significant work in process (most jobs are started and completed within a day). 2. Assume that a significant driver is equipment hours. Identify the expenses that would likely be traced to jobs using this driver. Explain why you feel these costs are traceable using equipment hours. What is the cost per equipment hour for these traceable costs?arrow_forwardDifferential Costing As pointed out earlier in Heres the Real Kicker, Kicker changed banks a couple of years ago because the loan officer at its bank moved out of state. Kicker saw that as an opportunity to take bids for its banking business and to fine-tune the banking services it was using. This problem uses that situation as the underlying scenario but uses three banks: FirstBank, Community Bank, and RegionalOne Bank. A set of representative data was presented to each bank for the purpose of preparing a bid. The data are as follows: Checking accounts needed: 6 Checks per month: 2,000 Foreign debits/credits on checking accounts per month: 200 Deposits per month: 300 Returned checks: 25 per month Credit card charges per month: 4,000 Wire transfers per month: 100, of which 60 are to foreign bank accounts Monthly credit needs (line of credit availability and cost): 100,000 average monthly usage These are overall totals for the six accounts during a month. Internet banking services? Knowledgeable loan officer? Responsiveness of bank? FirstBank Bid: Checking accounts: 5 monthly maintenance fee per account 0.10 foreign debit/credit 0.50 earned for each deposit 3 per returned check Credit card fees: 0.50 per item Wire transfers: 15 to domestic bank accounts, 50 to foreign bank accounts Line of credit: Yes, this amount is available, interest charged at prime plus 2%, subject to a 6% minimum interest rate Internet banking services? Yes, full online banking available: 15 one-time setup fee for each account 20 monthly fee for software module The loan officer assigned to the potential Kicker account had 10 years of experience with medium to large business banking and showed an understanding of the audio industry. Community Bank Bid: Checking accounts: No fees for the accounts, and no credits earned on deposits 2.00 per returned check Credit card fees: 0.50 per item, 7 per batch processed. Only manual processing was available, and Kicker estimated 20 batches per month Wire transfers: 30 per wire transfer Line of credit: Yes, this amount is available: interest charged at prime plus 2% subject to a 7% minimum interest rate Internet banking services? Not currently, but within the next 6 months The loan officer assigned to the potential Kicker account had 4 years of experience with medium to large business banking, none of which pertained to the audio industry. 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