Plasma Labs Inc. recently began production of a new product,flat panel displays,
ID: 2457907 • Letter: P
Question
Plasma Labs Inc. recently began production of a new product,flat panel displays, which required the investment of $3,000,000 inassets. The costs of producing and selling 20,000 units offlat panel displays are estimated as follows:
Variable Costs per unit:
Directmaterials $150
Directlabor 30
Factoryoverhead 50
Selling and Admin. Expenses 20
Total $250
Fixed Costs:
Factoryoverhead $2,000,000
Selling and Admin. Expenses 1,000,000
Plasma Labs Inc. is currently considering establishing a sellingprice for flat panel display. The president of Plasma Labs hasdecided to use the cost plus approach to product pricing and hasindicated that the displays must earn a 16% rate of return oninvested assets.
Instructions:
1. Determine the amount of desired profit from the productionand sald of flat panel displays.
2. Assuming that the total cost concept is used, determine (a)the cost amount per unit, (b) the markup percentage, and (c) theselling price of flat panel displays.
3. Assuming that the product cost concept is used, determine(a) the cost amount per unit, (b) the markup percentage (rounded tonearest two decimal places), and (c) the selling price of flatpanel displays (rounded to the nearest dollar).
4. Assuming that the variable cost concept is used, determine(a) the cost amount per unit, (b) the markup percentage, and (c)the selling price of flat panel display.
5. Comment on any additional considerations that couldinfluence establishing the selling price for flat paneldisplays.
6. Assumethat as of September 1, 2008, 13,000 units of flat panel displayshave been produced and sold during the current year. Analysisof the domestic market indicates that 4,400 additional units areexpected to be sold during the remainder of the year at the normalproduct price determined under the total cost concept. OnSeptember 3, Plasma Labs inc. received an offer from Vision SystemsInc. for 2,600 units of flat panel displays at $225each. Vision Systems Inc. will market the units in Canadaunder its own brand name, and no selling administrative expensesassociated with the sale will be incurred by Plasma LabsInc. The additional business is not expected to affect thedomestic sales of flat panel displays, and the additional unitscould be produced using existing capacity.
Note: 2. (b) Markup percentage is 6%
Plasma Labs Inc. recently began production of a new product,flat panel displays, which required the investment of $3,000,000 inassets. The costs of producing and selling 20,000 units offlat panel displays are estimated as follows:
Variable Costs per unit:
Directmaterials $150
Directlabor 30
Factoryoverhead 50
Selling and Admin. Expenses 20
Total $250
Fixed Costs:
Factoryoverhead $2,000,000
Selling and Admin. Expenses 1,000,000
Plasma Labs Inc. is currently considering establishing a sellingprice for flat panel display. The president of Plasma Labs hasdecided to use the cost plus approach to product pricing and hasindicated that the displays must earn a 16% rate of return oninvested assets.
Instructions:
1. Determine the amount of desired profit from the productionand sald of flat panel displays.
2. Assuming that the total cost concept is used, determine (a)the cost amount per unit, (b) the markup percentage, and (c) theselling price of flat panel displays.
3. Assuming that the product cost concept is used, determine(a) the cost amount per unit, (b) the markup percentage (rounded tonearest two decimal places), and (c) the selling price of flatpanel displays (rounded to the nearest dollar).
4. Assuming that the variable cost concept is used, determine(a) the cost amount per unit, (b) the markup percentage, and (c)the selling price of flat panel display.
5. Comment on any additional considerations that couldinfluence establishing the selling price for flat paneldisplays.
6. Assumethat as of September 1, 2008, 13,000 units of flat panel displayshave been produced and sold during the current year. Analysisof the domestic market indicates that 4,400 additional units areexpected to be sold during the remainder of the year at the normalproduct price determined under the total cost concept. OnSeptember 3, Plasma Labs inc. received an offer from Vision SystemsInc. for 2,600 units of flat panel displays at $225each. Vision Systems Inc. will market the units in Canadaunder its own brand name, and no selling administrative expensesassociated with the sale will be incurred by Plasma LabsInc. The additional business is not expected to affect thedomestic sales of flat panel displays, and the additional unitscould be produced using existing capacity.
- Prepare a differential analysis report of the proposedsale to Vision Systems Inc.
- Based upon the differential analysis report in part(a), should the proposal be accepted?
Note: 2. (b) Markup percentage is 6%
Explanation / Answer
Thank you for sharing the answer. # 5. You may write like this if you prefer. The cost-plus approach price of $424 should be viewed as a generalguideline (or target) for establishing long-run normal prices.Other considerations,such as the price of competing products andgeneral economic conditions of the marketplace, could lead management to establish a short-runprice more or less than $424.