6. Assume that as of August 1, 3,000 units of flat panel displays have been produced and sold during the current year. Analysis of the domestic market indicates that 2,000 additional units are expected to be sold during the remainder of the year at the normal product price determined under the product cost method. On August 3, Crystal Displays Inc. received an offer from Maple Leaf Visual Inc. for 800 units of flat panel displays at $225 each. Maple Leaf Visual Inc. will market the units in Canada under its own brand name, and no variable selling and administrative expenses associated with the sale will be incurred by Crystal Displays Inc. The additional business is not expected to affect the domestic sales of flat panel displays, and the additional units could be produced using existing factory, selling, and administrative capacity. a. Prepare a differential analysis of the proposed sale to Maple Leaf Visual Inc. If an amount is zero, enter "0". Differential Analysis Reject (Alt. 1) or Accept (Alt. 2) Order August 3 Reject Order (Alternative 1) Accept Order (Alternative 2) Differential Effects (Alternative 2) Revenues $ $ $ Costs Variable manufacturing costs Profit (loss) $ $ $ Feedback 6. a. Subtract the additional variable manufacturing costs from the additional revenues. Determine the differential effect on income of the revenues, costs, and income (loss). b. Based on the differential analysis in part (a), should the proposal be accepted

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.

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.

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