Durham Parts (DP) makes a variety of products. It is organized in two divisions, Eastern and Western. The managers for each division are paid, in part, based on the financial performance of their divisions. The Western Division normally sells to outside customers but, on occasion, also sells to the Eastern Division. When it does, corporate policy states that the price must be cost plus 25 percent to ensure a “fair” return to the selling division. Western received an order from Eastern for 1,200 units. Western’s planned output for the year had been 4,800 units before Eastern’s order. Western’s capacity is 6,000 units per year. The costs for producing those 4,800 units follow. 

Required

a. If you are the manager of the Western Division, what unit cost would you ask the Eastern Division to pay? Show calculations.

b. If you are the manager of the Eastern Division, what unit cost would you argue you should pay? Show calculations.

c. What unit cost would you recommend for a sale of units from the Western Division to the Eastern Division? Explain briefly. 

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Materials.. Direct labor.. Other costs varying with output. Fixed costs (do not vary with output). Total costs Total $240,000 115,200 76,800 288,000 $720,000 Per Unit $ 50 24 16 60 $150