St. Jacob's Electronics manufactures electrical components. The company is divided into four divisions: manufacturing, residential products, commercial products, and industrial products. The manufacturing division supplies the other three divisions with all their product requirements. Because the manufacturing division has no control over product price or sales, it is treated as a cost center and transfers its products to the other divisions at full cost plus a profit margin that is intended to provide a return on capital invested in the manufacturing division.
In late 1995, St. Jacob's Electronics implemented an activity costing system to develop more-accurate product costs for planning purposes. A central part of the implementation plan was to use the new costing system as the foundation for computing transfer prices.
The costing system uses the four-level activity costing hierarchy: unit costs, batch costs, product-related costs, and facility-sustaining costs. The detailed analysis of the company's cost structure revealed the following information.
Most of the product-related costs were lodged in the three profit centers. The exceptions were the costs of specialized equipment housed in the manufacturing division that was used uniquely by each of the three profit centers for their products. These product-related costs in the manufacturing division were $ 1,500,000, $500,000, and $600,000 for the residential, commercial, and industrial divisions, respectively. The balance of the capacity-related costs in the manufacturing division, which amounted to $2,400,000 and included a charge for capital invested, were allocated to the three divisions in proportion to their long-run expected use of the facility. This amounted to 50% for the residential division, 30% for the commercial division, and 20% for the industrial division. The amount of capacity related cost allocated to each division was the larger of amount of capacity used or amount of capacity reserved. Each division had the right to use its reserved level of capacity. If some capacity went unused by the division for which it was reserved and was used by another division, the division not using its capacity quota was given credit for its capacity that was used by other divisions.
In addition to the capacity-related costs, the manufacturing division incurred unit and batch- related costs when processing orders. All costs were charged to an order number. In this way, the cost sheet for each order accumulated the unit and batch-related costs for that order.
Some products were sold by more than one division. For example, connectors were sold by all three divisions. All the connectors used the same plastic formulation but different copper or brass components. Therefore, the manufacturing division accumulated orders for connectors, and when there were sufficient orders to make a batch of plastic, the plastic was made and then used to make the connectors for the different products. The cost of a batch of plastic included the raw materials cost and machine setup costs.
Once the plastic was made, it was used to complete the various batches of connectors for the different divisions. The only common component in these connectors was the plastic. Therefore the costs of other raw materials for each connector were accumulated separately and charged directly to the product. Recently, the manufacturing division completed an order of connectors that were sold to the residential division and the industrial division. The cost of the batch of plastic was $ 105,000, and it was used to make 50,000 connectors of two types—each connector using the same amount of plastic. The connectors are fed into a machine that inserts the brass fittings into the connector. It costs about $2000 to set up the machine for each batch of connectors; there were 30,000 connectors made for the residential division and 20,000 connectors made for the industrial division. The cost of the brass fittings were $0.56 for each residential connector and $ 1.78 for each industrial connector.
For each of the following use levels by the residential, commercial, and industrial divisions respectively, determine the resulting allocation of capacity-related costs:
(a) 45%, 35%, 15%
(b) 45%, 25%, 10%
(c) 45%, 30%, 25%
What is the cost per unit for each of the residential connectors described above? Make any required assumptions to answer this question.
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