Additional part of Question:
Crystal Displays 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 5,000 units of flat panel displays are estimated as follows: 1 Variable costs per unit: 2 Direct materials $120.00 3 Direct labor 30.00 4 Factory overhead 50.00 5 Selling and administrative expenses 35.00 6 Total variable cost per unit $235.00 7 Fixed costs: 8 Factory overhead $250,000.00 9 Selling and administrative expenses 150,000.00 Crystal Displays Inc. is currently considering establishing a selling price for flat panel displays. The president of Crystal Displays has decided to use the cost-plus approach to product pricing and has indicated that the displays must earn a 15% return on invested assets.
Answer:
<h2>Crystal Displays Inc.</h2>
Differential Analysis of Maple Leaf Visual Inc.'s Order
Reject (Alt. 1) Accept (Alt. 2)
Order August 3 0 800
Differential Effects
Revenues $0 $180,000
Variable manufacturing costs $0 $160,000
Profit (loss) $0 $20,000
Based on the differential analysis above, the proposal should be accepted. Crystal Displays Inc. will increase its profit by $20,000 from the additional order without spending additional selling, and other fixed costs.
Explanation:
a) Data and Calculations:
Investment in producing panel displays = $1,500,000
The costs of producing and selling 5,000 units of flat panel displays are estimated as follows:
1 Variable costs per unit:
2 Direct materials $120.00
3 Direct labor 30.00
4 Factory overhead 50.00
5 Selling and administrative expenses 35.00
6 Total variable cost per unit $235.00
7 Fixed costs:
8 Factory overhead $250,000.00
9 Selling and administrative expenses 150,000.00
Product cost using cost-plus pricing:
1 Variable costs per unit:
2 Direct materials $120.00
3 Direct labor 30.00
4 Factory overhead 50.00
5 Selling administrative
expenses 35.00
Total variable
manufacturing cost $235.00 *5,000 $1,175,000.00
Contribution $625,000.00
Fixed Costs:
Factory overhead $250,000.00
9 Selling and administrative expenses 150,000.00
Expected returns on invested assets
= 15% of $1,500,000 = $225,000
Income Statement:
Sales Revenue (5,000 x $360) $1,800,000.00
Manufacturing cost $235.00 1,175,000.00
Contribution $625,000.00
Fixed Costs:
Factory overhead $250,000.00
Selling and administrative expenses 150,000.00
Expected returns on invested assets
= 15% of $1,500,000 = $225,000
Special order from Maple Leaf Visual Inc.:
Flat panel displays = 800 units
Price = $225 each
Cost of production per unit = $200 ($235 - $35)
Contribution per unit = $25 ($225 - $200)
Differential analysis is a managerial technique which Crystal Displays Inc. can use to decide to accept or reject the additional order from Maple Leaf Visual Inc. for 800 units of flat panel displays at $225 each. After the analysis, it appears that Crystal Displays Inc. will make a profit of $25 per unit or a total profit of $20,000 from the additional order. Since this additional order does not require extension of the existing production capacity and costs, it looks reasonable to suggest that the business from Maple Leaf should be accepted.
