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?

Answer 1

Answer-a- The manager of the South Division would ask the North Division to pay Total Cost:-`1

Materials	$200
Direct Labor	$96
Other costs varying with output	$64
Fixed costs	$840
Total Costs	$1,200

The price also assumes a 15% increase in price:-

$1,200+($1,200*15%)

=$1,200+$180

=$1,380

b-However, North believes that the price should be $414 per unit to bring the total invoice to $248,400 for 600 units excluding fixed costs since its' an interdivision sales and including 15% increase.

Materials	$200
Direct Labor	$96
Other costs varying with output	$64
Total	$360

=$360+($360*15%)

=$360+$54

=$414