Need help on C TComm makes a variety of products It is organ

Need help on C.

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:

Required:

Options:

A. Use the full per unit cost for normal production of 1,200 units

B. Use only differential costs as the cost basis.

C. Use differential costs plus a share of fixed costs, based on actual production volume (with North\'s order) of 1,500 units.

a. 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.)

$716.40

b. 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.)

$200.40

c. What unit cost would you recommend for a sale of units from the South Division to the North Division? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

?

Solution

When the capacity of South Division is 1500 Units and its sale is only 1200 units the additional units that will be maufactured shall not result to:

a) Loss in profit margin

b) Additional fixed costs.

Since production of additional 300 units will not cause any additional fixed costs we cannot add that cost to the costing as it will not be incurred.

So when we use the differential costs method the cost shall be:

(92$ + 45$ + 30$ ) * 120%= 200.40$. Same as the second option. However if the question does not talk about the fair profit share we could reduce the 20% profit margin too and the cost would have been 167$.