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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
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.
Instructions

Assume that 15.000 units of the halogen light have been produced and sold during the current year. Analysis of the domestic market indicates that 2.000 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 total cost concept. Twilight Lumina Company received an offer from Contech Inc. for 3.000 units of the halogen light at $52 each. Contech Inc. will market the units in Southeast Asia under its own brand name, and no selling and administrative expenses associated with the sale will be incurred by Twilight Lumina Company. The additional business is not expected to affect the domestic sales of the halogen light, and the additional units could be produced using existing capacity.
a. Prepare a differential analysis report of the proposed sale to Contech Inc.
b. Based on the differential analysis report in part (a), should the proposal be accepted?

To determine

(a)

Concept Introduction:

Differential Analysis Report: This report involves analyzing the different benefit and cost that would arise from an alternative solution to a particular problem.

To Prepare:

The differential analysis report of the proposed sale to Contech Inc.

Explanation

Company received the offer from Contech Inc. for 3000 unit at $52 each. If company accept this offer, then it will not incur any selling and administrative expenses of the company which is $4.

So total cost of the product of the company is:

    ParticularAmount   ($)
    Direct Materials  $30
    Direct Labour  $10
    Factory Overhead  $6
    Total variable cost  $46

Fixed cost is not relevant for taking any decisions

To determine

(b)

Concept Introduction:

Differential Analysis Report: This report involves analyzing the different benefit and cost that would arise from an alternative solution to a particular problem.

To find out:

Whether the proposal is either accepted or not.

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