Night Watch Company recently began production of a new product, the halogen light, which required the investment of $500,000 in assets. The costs of producing and selling 12,000 halogen lights are estimated as follows:
|
Variable costs per unit: |
22 |
Fixed costs: |
|
|
Direct materials |
12 |
Factory overhead |
120,000 |
|
Direct labor |
6 |
Selling and administrative expense |
60,000 |
|
Selling and administrative expenses |
4 |
||
|
Total |
$44 |
Night Watch Company is currently considering establishing a selling price for the halogen light. The president of Night Watch Company has decided to use the cost-plus approach to product pricing and has indicated that the halogen light must earn a 12% 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 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 nearest whole dollar).
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 the halogen light.
4. 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, 2010, 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 total cost concept.
On September 5, Night Watch Company received an offer from Forever Glow Inc. for 2,000 units of the halogen light at $45 each. Forever Glow Inc. will market the units inJapanunder its own brand name, and no selling and administrative expenses associated with the sale will be incurred by Night Watch Company. The additional business is not expected to affect the domestic sales of the halogen light, and the additional units could be produced using existing capacity.
(a) Prepare a differential analysis report of the proposed sale to Forever Glow Inc.
(b) Based on the differential analysis report in part (a), should the proposal be accepted?