Question

Best Practices, Inc., is a management consulting firm. Its Corporate Division advises private firms on the adoption and use of cost management systems. Government Division consults with state and local governments. Government Division has a client that is interested in implementing an activity-based costing system in its public works department. The division’s head approached the head of Corporate Division about using one of its associates. Corporate Division charges clients $645 per hour for associate services, the same rate other consulting companies charge. The Government Division head complained that it could hire its own associate at an estimated variable cost of $245 per hour, which is what Corporate pays its associates.

 

Suppose that Government Division will charge the client interested in implementing an activity-based costing system by the hour based on cost plus a fixed fee, where the cost is primarily the consultant’s hourly pay. Assume also that Government Division cannot hire additional consultants. That is, if it is to do this job, it will need to use a consultant from Corporate Division.

 

Required:

a-1. What is the minimum transfer price that Corporate Division should obtain for its services, assuming that it is operating at capacity?

a-2. Would this be an ethical price to charge the Government client?

b-1. What is the transfer price you would recommend if Corporate Division was not operating at capacity?

b-2. Would this be an ethical price to charge the Government client?

Answer 1

A1) 645 per hour

A2) yes

B1) 645 per hour

B2)  Yes