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.

Alameda Instruments (AI) has offered to supply the Air Force with computer monitors at "cost plus 20 percent." AI operates a manufacturing plant that can produce 22,000 monitors per year, but it normally produces 20,000. The costs to produce 20,000 monitors follow:

Alameda Instruments (AI) has offered to supply the Air Force with computer monitors at "cost plus 20 percent." AI operates a manufacturing plant that can produce 22,000 monitors per year, but it normally produces 20,000. The costs to produce 20,000 monitors follow:

	Total Cost			Cost per Monitor
Production costs:
Materials	$	1,340,000		$	67
Labor		1,860,000			93
Supplies and other costs that will vary with production		860,000			43
Indirect cost that will not vary with production		640,000			32
Variable marketing costs		1,720,000			86
Administrative costs (all fixed)		1,060,000			53
Totals	$	7,480,000		$	374

Based on these data, company management expects to receive $448.8 (= $374 × 120 percent) per monitor for those sold on this contract. After completing 2,000 monitors, the company sent a bill (invoice) to the government for $897,600 (= 2,000 monitors × $448.8 per monitor).

The president of the company received a call from an Air Force auditor, who stated that the per monitor cost should be

Materials	$	67
Labor		93
Supplies and other costs that will vary with production		43
	$	203

Therefore, the price per monitor should be $243.6 (= $203 × 120 percent). The Air Force ignored marketing costs because the contract bypassed the usual selling channels.

Required:

What is the price per computer monitor that should be charged by Alameda Instruments under the following options for considering the cost basis of the monitors? (Round your intermediate calculations to 2 decimal places and your final answers to 2 decimal places.)

Options:
A.	Only the differential production costs are used as the cost basis.
B.	The total cost per monitor for normal production of 20,000 monitors are used as the cost basis.
C.	The total cost per monitor for production of 22,000 monitors, excluding marketing costs, are used as the cost basis.
D.	The total cost per monitor for production of 22,000 monitors, including marketing costs, are used as the cost basis.

Explanation:

Costs				Unit Cost Options (One Unit = One Monitor)
					A			B			C			D
Materials (variable)	$	67.00		$	67.00		$	67.00		$	67.00		$	67.00
Labor (variable)		93.00			93.00			93.00			93.00			93.00
Supplies (variable)		43.00			43.00			43.00			43.00			43.00
Indirect costs (fixed)		640,000			N/A			32.00	a		29.09	b		29.09
Marketing (variable)		86.00			N/A			86.00			N/A			86.00
Administrative (fixed)		1,060,000			N/A			53.00	c		48.18	d		48.18
Per monitor cost basis				$	203.00		$	374.00		$	280.27		$	366.27
Per monitor price (Cost + 20%)				$	243.60		$	448.80		$	336.32		$	439.52

a	$32.00 = $640,000 ÷ 20,000 units.
b	$29.09 (rounded)  = $640,000 ÷ 22,000 units.
c	$53.00 = $1,060,000 ÷ 20,000 units.
d	$48.18 (rounded) = $1,060,000 ÷ 22,000 units.

Betty’s Fashions operates retail stores in both downtown and suburban locations. The company has two responsibility centers: the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban locations.

Betty’s Fashions operates retail stores in both downtown and suburban locations. The company has two responsibility centers: the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban locations. Betty’s CEO is concerned about the profitability of the City Division, which has been operating at a loss for the last several years. The most recent City Division income statement follows. The CEO has asked for your advice on shutting down the City Division’s operations. If the City Division is eliminated, corporate administration is not expected to change, nor are any other changes expected in the operations or costs of the Mall Division.

BETTY'S FASHIONS, CITY DIVISION Divisional Income Statement For the Year Ending January 31
Sales revenue	$	4,500,000
Costs
Advertising—City Division		177,000
Cost of goods sold		2,350,000
Divisional administrative salaries		292,000
Selling costs (sales commissions)		582,000
Rent		737,000
Share of corporate administration		477,000
Total costs	$	4,615,000
Net loss before income tax benefit	$	-115,000
Tax benefit at 40% rate		46,000
Net loss	$	-69,000

Required:

What revenues and costs are probably differential for the decision to discontinue City division's operations?

State University Business School (SUBS) offers several degrees, including Bachelor of Business Administration (BBA). The new dean believes in using cost accounting information to make decisions and is reviewing a staff-developed income statement broken down by the degree offered. The dean is considering closing down the BBA program because the analysis, which follows, shows a loss. Tuition increases are not possible. The dean has asked for your advice. If the BBA degree program is dropped, school administration costs are not expected to change, but direct costs of the program, such as operating costs, building maintenance, and classroom costs, would be saved. There will be no other changes in the operations or costs of other programs. STATE UNIVERSITY BUSINESS SCHOOL, BBA DEGREE Degree Income Statement For the Academic Year Ending June 30 Revenue $ 350,000 Costs Advertising—BBA program 12,000 Faculty salaries 195,000 Degree operating costs (part-time staff) 35,000 Building maintenance 31,000 Classroom costs (building depreciation) 60,000 Allocated school administration costs 31,600 Total costs $ 364,600 Net loss $ (14,600) Required: What revenues and costs are probably differential for the decision to drop the BBA program?

State University Business School (SUBS) offers several degrees, including Bachelor of Business Administration (BBA). The new dean believes in using cost accounting information to make decisions and is reviewing a staff-developed income statement broken down by the degree offered. The dean is considering closing down the BBA program because the analysis, which follows, shows a loss. Tuition increases are not possible. The dean has asked for your advice. If the BBA degree program is dropped, school administration costs are not expected to change, but direct costs of the program, such as operating costs, building maintenance, and classroom costs, would be saved. There will be no other changes in the operations or costs of other programs.

STATE UNIVERSITY BUSINESS SCHOOL, BBA DEGREE Degree Income Statement For the Academic Year Ending June 30
Revenue	$	350,000
Costs
Advertising—BBA program		12,000
Faculty salaries		195,000
Degree operating costs (part-time staff)		35,000
Building maintenance		31,000
Classroom costs (building depreciation)		60,000
Allocated school administration costs		31,600
Total costs	$	364,600
Net loss	$	(14,600)

Required:

What revenues and costs are probably differential for the decision to drop the BBA program?