Governance, transfer pricing. The Caledonia plant of Melrose Automotive Inc. manufac- tures recliners for car seats that are assembled in the Alliston Plant. The recliners are trans- ferred at 300% of variable costs. The currently reported variable cost of each recliner is $2.54. John Cross, the production manager of Caledonia Plant, required the controller to revise the variable costs reported for each recliner. Cross said to the controller: "I am not sure about the fixed and variable cost distinctions you are making. I think the variable costs are higher than $2.541 per recliner." The controller knows that showing higher variable costs will increase Caledonia Plant's profits and lead to higher bonuses for all the employees, and particularly for the managers. The controller is uncomfortable about making any changes because he has used the same method to classify costs as either fixed or variable over the last few years. But both John Cross and the controller know that fixed and variable cost distinctions are not always clear cut. REQUIRED 1. Calculate Caledonia Plant's contribution margin from transferring 10,000 recliners if

(a) variable costs are $2.54 per recliner, and

(b) variable costs are $3 per recliner. 2. Evaluate whether John Cross's suggestion to the controller regarding variable costs is ethical. Would it be ethical for the controller to revise the variable cost per unit? What steps should the controller take to resolve this situation?

LO1