HD Labs Inc. recently began production of a new product, flat panel displays, which required the
investment of $1,500,000 in assets. The costs of producing and selling 12,000 units of flat panel displays
are estimated as follows:
Variable costs per unit:
Direct materials $140
Direct labor 30
Factory overhead 50
Selling and administrative expenses 25
Total $245
Fixed costs:
Factory overhead $960,000
Selling and administrative expenses 480,000
HD Lavs Inc. is currently considering establishing a selling price for flat panel displays. The president of
HD Labs had decided to use the cost-plus approach to product pricing and has indicated that the
displays must earn a 20% rate of return on invested assets.
Instructions:
1. Determine the amount of desired profit from the production and sale of flat panel displays
1500000*.2 = $300000
2. Assuming that the total cost concept is used, determine
(a) the cost amount per unit,
245+(960000+480000/12000) = 365
(b) the markup percentage (rounded to two decimal places), and (c ) the selling price of flat panel
displays (rounded to the nearest whole dollar).
300000/12000 = 25 per nit is the profit
The markup percentage = 25/365 = .0685 or 6.85%
Selling price = 365+25 = $390
3. 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 flat panel displays.
220+960000/12000 = 300
25/300 = .0833 or 8.33%
Selling price = $390
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 displays.
$245 per unit
25/245 = .102 or 10.2%
Selling price =$390
5. Comment on any additional considerations that could influence establishing the selling price for flat
panel displays.
a. Prices being offered by competitors
b. Life Cycle of the product.
c. 6. Assume that as of August 1, 2010, 5,000 units of flat panel displays have been produced and
sold during the current year. Analysis of the domestic market indicates that 4,000 additional
units are expected to be sold during the remainder of the year at the normal product price
determined under the total cost concept. On August 3, HD Labs Inc. received an offer from
Vision Systems Inc. for 1,500 units of flat panel displays at $235 each. Vision Systems Inc. will
market the units in Canada under its own brand name, and no selling and administrative
expenses associated with the sale will be incurred by HD Labs Inc. The additional units could be
produced using existing capacity.
a. Prepare a differential analysis report of the proposed sale to Vision Systems Inc.
Incremental Sales = 1500*235
= 352500
Less
Differential cost
Variable product cost
140+30+50*1500
=-330000
Incremental profit
= 22500
b. Based on the differential analysis report in part (a), should the proposal be accepted?
As the order will add profit of $22500 to overall income of the company, therefore it should be
accepted.