One month ago, Wakefield Hospital redesigned their responsibility accounting structure to designate each department as a profit
Question:
One month ago, Wakefield Hospital redesigned their responsibility accounting structure to designate each department as a profit center. On purpose, the administration did not dictate any transfer pricing rules in performing this redesign so as to give the managers relatively unbounded autonomy in their transfer pricing negotiations. Consequently, all department heads developed their own pricing schemes for charging other departments and the market, where applicable. Kip Dynamite, Operating Room Manager, has just received a price estimate from the Legal Department for reviewing some maintenance contracts held by the operating room. The estimate is $400 for 2 hours of work. Kip is shocked that a formerly free service could cost so much, so he makes some calls. He finds several contract lawyers charging between $150 and $170 per hour. He immediately calls Manuel Sanchez, manager of the Legal Department, and demands to know why his price is so high. Manuel replies that his price breaks down to $200 per hour (10% variable costs, 80% fixed costs, 10% profit) because that is what he can charge in the market. The Legal Department is always at capacity because it provides services to the market by consulting for smaller medical facilities in the area. Kip threatens to take his business elsewhere, and both Manuel and Kip email the CFO, Liz Lucas, with their sides of the story.
Assume the Legal Department is not at capacity. Based on the concepts from the course, which of the following is NOT true about the situation faced by the Legal Department? Group of answer choices
-At a minimum, the Legal Department should charge the OR its incremental variable cost of $20, and perhaps more to cover some or all of its other costs and profit.
-Though the OR found cheaper prices for legal services outside, there is no guarantee, at least in the information given above, that the services are comparable.
-The Legal Department can simply charge the OR the price of $150 found outside, but it will lose money on its services.
Organic Chemistry
ISBN: 978-1118133576
11th edition
Authors: Graham Solomons, Craig Fryhle, Scott Snyder