   Chapter 12, Problem 12.5.1P

Chapter
Section
Textbook Problem

Product pricing using the cost-plus approach concepts; differential analysis report for accepting additional business Twilight Lumina Company recently began production of a new product, the halogen light. which required an investment of \$1,200,000 in assets. The costs of producing and selling 20.000 halogen lights are estimated as follows: Twilight Lumina Company is currently considering establishing a selling price for the halogen light. The president of Twilight Lumina Company has decided to use the cost-plus approach to product pricing and has indicated that the halogen light must earn a 20% rate of return on invested assets. InstructionsDetermine the amount of desired profit from the production and sale of the halogen light.

To determine

Concept Introduction:

Cost Volume Profit (CVP) Analysis:

The Cost Volume Profit analysis is the analysis of the relation between cost, volume, and profit of a product. It analyzes the cost and profits at the different level of production, in order to determine the breakeven point and required the level of sales to earn the desired profit.

Contribution margin means the margin that is left with the company after recovering variable cost out of revenue earned by selling smart phones.

The formula for contribution margin is as follows:

Contribution margin = Sales - Variable cost.

Similarly contribution margin ratio = Contribution/sales

To Calculate:

The desired profit

Explanation

The desired profit is calculated as follows:

 Required Investment (A) \$ 1,200,000

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