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 15 percent to ensure a “fair” return to the selling division. South received an order from North Division for 600 units. South’s planned output for the year had been 2,400 units before North’s order. South’s capacity is 3,000 units per year. The costs for producing those 2,400 units follow:

Based on these data, South’s controller calculated that the unit price for North’s order should be $1,380 (= $1,200 × 115 percent). After producing and shipping the 600 units, South sent an invoice for $828,000. Shortly thereafter, South received a note from the buyer at North stating that this invoice was not in accordance with company policy. The unit cost should have been
Materials......................................................................................... $200
Direct labor..................................................................................... 96
Other costs varying with output...................................................... 64
Total $360
The price per unit would be $414 (= $360 × 115 percent).

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

Transcribed Image Text:

Total Per Unit $ 480,000 $200 96 64 2,016,000 840 Total costs... $2,880,000 $1,200 Materials 230,400 153,600 Other costs varying with output Fixed costs