Chapter 1, Problem 39P

a.

To determine

Identify the unit cost which would be asked from the North Division to pay by the manager of the South Division.

Explanation of Solution

The manager of the South Division is charging the cost on per unit basis including the fixed cost per unit. The differential costs are not taken into account while computing the cost per unit.

The options of charging the cost to North Division are as follows:

Option A: The price can be charged on the basis of the full per unit cost of 2,400 units.

Option B: The use of only differential costs for determining the price.

Option C: The use of differential costs and per unit fixed cost for calculating the price.

Particulars	Costs	Unit cost Options
		A	B	C
Direct materials	$           200 (1)	$        200	$        200	$        200
Direct Labor	$             96 (2)	$          96	$          96	$          96
Other variable costs	$             64 (3)	$          64	$          64	$          64
Fixed costs	$ 2,016,000	$    840 (4)	$            -	$        672 (5)
Per cost unit		$     1,200	$        360	$     1,032
Cost plus 15%		$     1,380	$        414	$     1,187
Total price (600 units)		$ 828,000	$ 248,400	$ 712,080

The unit cost which would be asked from the North Division to pay by the manager of the South Division is as stated in Option A. The cost does not include the differential cost.

Thus, the unit cost which would be asked from the North Division to pay by the manager of the South Division is $1,200 per unit.

Working note 1:

Compute the Direct materials cost per unit:

$\begin{array}{c}\text{Direct}\text{materials}\text{cost}\text{=}\frac{\text{Total}\text{cost}}{\text{Number}\text{of}\text{units}}\\ =\frac{\$230,400}{2,400}\\ =\$96\end{array}$

Working note 2:

Compute the Direct labor cost per unit:

$\begin{array}{c}\text{Direct}\text{labor}\text{cost}\text{=}\frac{\text{Total}\text{cost}}{\text{Number}\text{of}\text{units}}\\ =\frac{\$480,000}{2,400}\\ =\$200\end{array}$

Working note 3:

Compute the other variable cost per unit:

$\begin{array}{c}\text{Other variable}\text{cost}\text{=}\frac{\text{Total}\text{cost}}{\text{Number}\text{of}\text{units}}\\ =\frac{\$153,600}{2,400}\\ =\$64\end{array}$

Working note 4:

Compute the fixed cost per unit in option A:

$\begin{array}{c}\text{Fixed}\text{}\text{cost per unit}\text{=}\frac{\text{Total}\text{cost}}{\text{Number}\text{of}\text{units}}\\ \text{=}\frac{\text{\$2,016,000}}{\text{2,400}}\\ \text{=}\text{\$840}\end{array}$

Working note 5:

Compute the fixed cost per unit in option C:

$\begin{array}{c}\text{Fixed}\text{}\text{cost per unit}\text{=}\frac{\text{Total}\text{cost}}{\text{Number}\text{of}\text{units}}\\ \text{=}\frac{\text{\$2,016,000}}{\text{3,000}}\\ \text{=}\text{\$672}\end{array}$

b.

To determine

Identify the unit cost which would be argued from the North Division to be paid by the manager of the North Division.

Explanation of Solution

The unit cost which would be argued from the North Division to be paid by the manager of the North Division is as stated in Option C. The cost includes the differential cost as well as unit fixed costs.

Thus, the unit cost which would be argued from the North Division to be paid by the manager of the North Division is $1,032 per unit.

c.

To determine

Explain the unit cost which should be recommended for a sale of units from the South Division to the North Division.

Explanation of Solution

The unit cost which should be recommended for a sale of units from the South Division to the North Division is as stated in Option B. The cost includes the differential cost.

Thus, the unit cost which should be recommended for a sale of units from the South Division to the North Division is $300 per unit.