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 15 percent to ensure a “fair” return to the selling division. South received an order from North for 600 units. South’s planned output for the year had been 2,400 units before North’s order. South’s capacity is 3,000 units per year. The costs for producing those 2,400 units follow.

	Total				Per Unit
Materials	$	480,000			$	200
Direct labor		230,400				96
Other costs varying with output		153,600				64
Fixed costs (do not vary with output)		2,016,000				840
Total costs	$	2,880,000			$	1,200

Required:

a. If you are the manager of the South Division, what unit cost would you ask the North Division to pay?
b. If you are the manager of the North Division, what unit cost would you argue you should pay?

Per unit cost (plus 15%):

Answer 1

Answer:

Solution a:

If I am the manager of south division,

Unit cost = Unit cost + 15% markup

= $1,200 + $1,200*15% = $1,380 per unit

Solution b:

As South division is normally selling to outside customer 2400 units a year, Further no additional fixed cost will be incurred for additional 600 unit produced.

it is having spare capacity to produce 600 units for north division

therefore it will not loose any regular sales.

SO, Further no additional fixed cost will be incurred for additional 600 unit produced.

If i am the manager of north division,

Unit cost = Variable cost per unit + 15% Markup

= ($200 + $96 + $64) + $360*15%

= $414 per unit