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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Product pricing using the cost-plus approach concepts; 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 $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% rate of return on invested assets.

Instructions

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 (a) the cost amount per unit, (b) the markup percentage, and (c) the selling price of the halogen light.

3.    (Appendix) Assuming that the total cost concept is used, determine (a) the cost amount per unit, (b) the markup percentage (rounded to two decimal places), and (c) the selling price of the halogen light (rounded to the nearest whole dollar).

4.    (Appendix) Assuming that the variable cost concept is used, determine (a) the cost amount per unit, (b) the markup percentage (rounded to two decimal places), and (c) the selling price of the halogen light (rounded to nearest whole dollar).

5.    Comment on any additional considerations that could influence establishing the selling price for the halogen light.

6.    Assume that as of September 17,000 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.

  1. a. Prepare a differential analysis of the proposed sale to Tokyo Lighting Inc.
  2. b. Based tin the differential analysis in part (a), should the proposal be accepted?

a)

To determine

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.

Product Cost per unit = Total Product CostEstimated Units Produced and sold

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.

Markup Percentage = (DesiredProfit) + (Total Selling andAdmininstrative Expenses)Total Product Cost

Selling Price: Selling price is calculated by summing up the product cost per unit and the per unit markup cost

To Determine: The desired profit of Company NG.

Explanation

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.

Desired profit = 10% of Invested assets= $600,000&#

b)

To determine
On the basis of product cost concept, for Company NG

  1. i. Cost per unit
  2. ii. Markup percentage
  3. iii. Selling price of halogen lights

c)

To determine
On the basis of total cost concept, for Company NG

  1. i. Cost per unit
  2. ii. Markup percentage
  3. iii. Selling price of halogen lights

d)

To determine
On the basis of variable cost concept, for Company NG

  1. i. Cost per unit
  2. ii. Markup percentage
  3. iii. Selling price of halogen lights

e)

To determine

To Comment: On any other considerations that would influence the price of halogen light.

f) i)

To determine

To Prepare: The differential analysis of Company NG, for the proposed offer to either accept or reject it.

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