Allocation of Central Office Overhead. Wilbur Company has several departments which operate quite autonomously as far as decision making is concerned. The company allocates central office overhead to these operating departments based on the total labor dollars incurred by each. The central office overhead budget and the allocation rate are as follows:

Allocation rate: \(\$ 500,000 \div \$ 1,000,000=\$ 0.50\) per labor dollar The central office overhead of \(\$ 500,000\) is considered to be a fixed cost. Also, once the rate is established, it is not changed for one year.
The Engineering Research Department conducts research on certain engineering problems related to the company's products and issues reports to clients who request this service. The manager of this department is faced with a need to hire two more technical assistants because of an increased workload. If the manager hires through the company's Personnel Department, these positions can be filled at a cost of \(\$ 1,500\) per month for each employee. However, the usual \(\$ 0.50\) per dollar of payroll will also be charged against the Engineering Research Department's budget for central office overhead. The manager discovers that it is possible to contract for technical services from an outside engineering firm which will furnish two technical assistants for as long as they are required. The cost would be considered a consulting cost and not part of the division's payroll. The cost will be \(\$ 2,000\) per month for each assistant.
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1. Is the central office overhead charge a transfer price? Explain.
2. What is the manager of the Engineering Research Department likely to do? Show calculations to support your answer.
3. If Wilbur Company wants to continue to allocate central office overhead, advise the president how this might be done so as not to affect the hiring decisions of the various department managers.

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Executive offices Legal.. Advertising Personnel Accounting Total.. Total estimated payroll in operating departments $ 200,000 70,000 60,000 100,000 70,000 $ 500,000 $1,000,000