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:	Â	Fixed costs:	Â
Direct materials	$32	Factory overhead	$180,000
Direct labor	12	Selling and administrative expenses	80,000
Factory overhead	8	Â	Â
Selling and administrative expenses	7	Â	Â
Total	$59	Â	Â

 

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 1, 7,000 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 administra- tive expenses associated with the sale will be incurred by Night Glow Inc. The ad- ditional 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.

a.      Prepare a differential analysis of the proposed sale to Tokyo Lighting Inc.

b.       Based on the differential analysis in part (a), should the proposal be accepted?