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Product Pricing Concepts

Display Labs Inc. recently began production of a new product, flat panel displays, which required the investment of $2,500,000 in asests. The costs of producing and selling 25,000 units of flat panel displays are estimated as follows:

Variable cost per unit: Fixed Cost:
Direct materials $170 Factory overhead $1,500,000
Direct labor $40 Selling + Administrative cost $500,000
Factory overhead $50
Selling and administrative expenses $20
TOTAL =$280

Display Labs Inc. is currently considering establishing a selling price for flat panel displays. The president of Display Labs has decided to use cost-plus approach to product pricing and has indicated that the displays must earn an 18% rate of return on invested asests.

INSTRUCTIONS
1. Determine the amount of desired profit from the production and sale 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) the selling 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, and (C) the selling price of flat panel displays.

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

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Part 1
Since the invested amount is $2,500,000 the required return is 18% * $2,500,000 = $450,000.
Thus the desired profit is $450,000.

Part 2
Using the total cost concept, all costs of manufacturing a product plus the selling and administrative expenses are included in the cost amount to which the markup is added. Since all costs and expenses are included in the cost amount, the dollar amount of the markup equals the desired profit.
Markup percentage = ...

Solution Summary

This solution looks at product pricing using the total cost, product cost and variable cost concepts.

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