Response to the following problem:
Hillard Company recently began production of a new product, SR10, which required the investment of $1,600,000 in assets. The costs of producing and selling 80,000 units of Product SR10 are estimated as follows:
Variable costs:
Direct materials $10.00 per unit
Direct labor 6.00
Factory overhead 4.00
Selling and administrative expenses 5.00
Total $25.00 per unit
Fixed costs:
Factory overhead $800,000
Selling and administrative expenses 400,000
Hillard Company is currently considering establishing a selling price for Product SR10. The president of Hillard Company has decided to use the costplus approach to product pricing and has indicated that Product SR10 must earn a 10% rate of return on invested assets.
Instructions
1. Determine the amount of desired profit from the production and sale of Product SR10.
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 Product SR10.
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 Product SR10.
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 Product SR10
5. Assume that for the current year, the selling price of Product SR10 was $42 per unit. To date, 60,000 units have been produced and sold, and analysis of the domestic market indicates that 15,000 additional units are expected to be sold during the remainder of the year. Recently, Hillard Company received an offer from Ming Inc. for 4,000 units of Product SR10 at $28 each. Ming Inc. will market the units in China under its own brand name, and no additional selling and administrative expenses associated with the sale will be incurred by Hillard Company. The additional business is not expected to affect the domestic sales of Product SR10, and the additional units could be produced during the current year, using existing capacity.
(a) Prepare a differential analysis report of the proposed sale to Ming Inc.
(b) Based on the differential analysis report in (a), should the proposal be accepted?