Ringer Company makes a variety of products. It is organized in two divisions, East and West. West Division normally sells to outside customers but, on occasion, also sells to the East 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. West received an order from East Division for 600 units. West’s planned output for the year had been 2,400 units before East’s order. West’s capacity is 3,000 units per year. The costs for producing those 2,400 units follow.

Based on these data, West’s controller calculated that the unit price for East’s order should be $690 (= $600 × 115 percent). After producing and shipping the 600 units, West sent an invoice for $414,000. Shortly thereafter, West received a note from the buyer at East stating that this invoice was not in accordance with company policy. The unit cost should have been

Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $100

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Other costs varying with outpput . . . . . . . . . . . . . . . . . . . . . . . . . .    32

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $180

The price per unit would be $207 (= $180 × 115 percent).

Required

If the corporation asked you to review this intercompany policy, what policy would you recommend? Why?

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Tota Per Unit S 240,000 $100 Materials Direct labor .-....-. Other costs varying with output. Fixed costs. . . . Total costs······ 48 32 1008000 420 $1,440,000 600 115,200 76,800 …