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	$	118,800			$	99
Direct labor		56,400				47
Other costs varying with output		33,600				28
Fixed costs (do not vary with output)		492,000				410
Total costs	$	700,800			$	584

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?

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.)

	Per unit cost (plus 20%)

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.)

	Per unit cost (plus 20%)

Answer 1

a. Per unit cost (plus 20%): $700.80

The manager of the South Division, would ask the North Division to pay it at its cost of $584 + 20% which is $584 x 1.20 = $700.80 per unit as per the corporate policy.

b. Per unit cost (plus 20%): $208.80

The manager of the North Division would argue that since the North Division’s order for 300 units is within the capacity of the South Division, no additional fixed costs would be incurred by the South Division for the North Division’s order. Hence, the unit cost should be based only on the variable costs of production which are $99 + $47 + $28 = $174. Hence, the North Division would be willing to pay $174 + 20% which is $174 x 1.20 = $208.80.