Cheng and Gonzales operate a trucking company that hauls produce from California to the East Coast. There are three departments:

West Coast, Midwest, and East Coast. A number of support services for the departments are provided in California. One of these is truck maintenance. When a driver returns to California to pick up produce, trucks may be washed and serviced, and any repairs may be undertaken. The maintenance department’s operating costs per month are $16,000 plus $35 per labor hour for the hours worked on each truck. Last year’s demand was as follows:

REQUIRED
A. Allocate total costs based on the single-rate method using budgeted hours.
B. Allocate total costs based on the single-rate method using actual hours.
C. Allocate total costs based on the dual-rate method, using budgeted hours for fixed costs and actual hours for variable costs.
D. Describe the optimal use of the maintenance department by the three trucking departments.
E. Suppose these allocations are considered part of each manager’s department costs, and the managers are rewarded for reducing costs. Describe managers’ incentives for determining a budgeted amount and then for their actual usage under:
1. Single-rate method using budgeted hours.
2. Single-rate method using actual hours.
3. Dual-rate method.
F. Recommend a transfer pricing policy for the maintenance department, and list several advantages and disadvantages for thatpolicy.

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Department West Coast Midwest East Coast Budgeted 300 hours 350 hours 400 hours Actual 270 hours 380 hours 400 hours