Saturday, 29 November 2014

T-Comm makes a variety of products. It is organized in two divisions, North and South. 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 Division 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:

T-Comm makes a variety of products. It is organized in two divisions, North and South. 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 Division 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 $ 116,400   $ 97  
  Direct labor   60,000     50  
  Other costs varying with output   44,400     37  
  Fixed costs   516,000     430  
 





  Total costs $ 736,800   $ 614  
 












     Based on these data, South's controller calculated that the unit price for North's order should be $736.8 (= $614 × 120 percent). After producing and shipping the 300 units, South's sent an invoice for $221,040. Shortly thereafter, West received a note from the buyer at North's stating that this invoice was not in accordance with company policy. The unit cost should have been

 
  Materials $ 97  
  Direct labor   50  
  Other costs varying with output   37  
 


  Total $ 184  
 







The price per unit would be $220.8 (= $184 × 120 percent).

Required:
What is the total price for 300 units of products that should be charged by South Division under the following options for considering the cost basis of units? (Do not round intermediate calculations.)

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.


Explanation:
Costs Unit Cost Options:
        A B C
  Direct materials (variable) $ 97   $ 97   $ 97   $ 97  
  Direct Labor (variable)   50     50     50     50  
  Other variable costs   37     37     37     37  
  Fixed costs   516,000     430 a   N/A     344 b
       








  Per unit cost       $ 614   $ 184   $ 528  
  Cost plus 20%         736.80     220.80     633.60  
       








  Total price (300 units)       $ 221,040   $ 66,240   $ 190,080  
       


















a $430 = $516,000÷ 1,200 units.
b $344 = $516,000 ÷ 1,500 units.