Question

T-Comm makes a variety of products. It is organized in two divisions, North and South. The managers for each division are paid, in part, based on the financial performance of their divisions. The South Division normally sells to outside customers but, on occasion, also sells to the North Division. When it does, corporate policy states that the price must be cost plus 20 percent to ensure a “fair” return to the selling division. South received an order from North for 300 units. South’s planned output for the year had been 1,200 units before North’s order. South’s capacity is 1,500 units per year. The costs for producing those 1,200 units follow: Total Per Unit Materials $ 111,600 $ 93 Direct labor 55,200 46 Other costs varying with output 42,000 35 Fixed costs (do not vary with output) 528,000 440 Total costs $ 736,800 $ 614

Required: Options: A. Use the full per unit cost for normal production of 1,200 units

B. Use only differential costs as the cost basis.

C. Use differential costs plus a share of fixed costs, based on actual production volume (with North's order) of 1,500 units.

a. If you are the manager of the South Division, what unit cost would you ask the North Division to pay? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

b. If you are the manager of the North Division, what unit cost would you argue you should pay? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

c. What unit cost would you recommend for a sale of units from the South Division to the North Division? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Answer 1

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Materials		$ 111,600	$         93
Direct Labor		$   55,200	$         46
Other Costs		$   42,000	$         35
Fixed Cost		$ 528,000	$       440
Total		$ 736,800	$       614
Option A:
Full Cost		$         614
Add: 20%		$   122.80
		$   736.80
Option B:
Differential Cost (Other than Fixed)		$         174
Add: 20%		$     34.80
		$   208.80
Option C:
Differential Cost (Other than Fixed)		$         174
Add: Fixed Cost Share		$         440
		$         614
Add: 20%		$     34.80
		$   648.80
Requirement a:	South Manager
Full Cost		$         614
Add: 20%		$   122.80
		$   736.80
Requirement b:	North Manager
Differential Cost (Other than Fixed)		$         174
Add: 20%		$     34.80
		$   208.80
Requirement c:
Would Recommend $208.8 (only incremental cost)