2.

CHS is a large multidivision firm. One division, Health Services, is well known inside CHS for its efficient information technology (IT). A smaller division, Optics, has approached Health Services with a proposal that it provide IT support in the form of machine time for some of Opticss billing and administrative work.

After an analysis of the demands that Optics would place on the system, the IT manager of Health Services notes that Health Services would have to lease a new server because of the additional load. The lease rates for the current server are a fixed annual lease of $3,280 and it averages machine time of 2,840 hours annually. The new server leases for an annual rate of $5,040. Because the new server is a faster machine, Health Services can complete its current requirements in only 2,080 hours. The work for Optics is estimated to be 1,070 hours.

In addition to leasing a new server, there are two other changes Health Services would have to make in IT. First, they will have to upgrade their server support position. The IT manager estimates that it will cost an additional $20,300 per year to get an individual with the necessary advanced training. In addition, Health Services has a contract for service from the machine vendor. The support contract is a fixed price contract of $4.00 per hour of machine usage. The current lease contract can be canceled at no cost if Health Services leases a more expensive machine.

Required:

(a)

Assume that no outside market exists for this service and that Health Services would have excess capacity on the new server. Compute the total fixed fee and the variable cost which Health Services should use as the optimal transfer price rule to charge Optics. (Round variable cost to 2 decimal places.)

Total fixed fee
Variable cost		per hour

(b)

Suppose Optics uses 1,070 hours on the new machine. What is the average cost per hour Optics would pay using the rule developed in part (a)? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Average cost

per hour

(c)	Suppose Optics uses 108 hours on the new machine. What is the average cost per hour Optics would pay using the rule developed in part (a)? (Round total variable costs to the nearest dollar and your final answer to two decimal places.)

	Average cost ? per hour