Assessment 1 Part 1: Cost Data for Managerial Purposes Scenario T-Rex Company makes a variety of products. It is organized in two divisions, East and West. The managers for each division are paid, in part, based on the financial performance of their divisions. The West Division normally sells to outside customers but, on occasion, also sells to the East Division. When it does, corporate policy states that the price must be cost plus 15 percent to ensure a "fair" return to the selling division. West received an order from East for 600 units. West's planned output for the year had been 2,640 units before East's order. West's capacity is 3,300 units per year. The costs for producing those 2,640 units follow: Production Costs for 2,640 Units Materials Direct Labor Cost Other Costs Varying with Output Fixed Costs (do not vary with output) Total Costs TOTAL PER UNIT $ 528,000.00 $ 200.00 $ 253,440.00 $ 96.00 $ 168,960.00 $ 64.00 $ 2,217,600.00 $ 840.00 $ 3,168,000.00 $ 1,200.00 This problem demonstrates the ambiguity in measuring "costs." West Division's controller included the "per unit" fixed costs, which were calculated for allocation purposes under normal production volume, when he or she calculated per unit cost of the additional production. The controller charged East Division on that basis, ignoring the differential costs as a basis for interdivision sales. Possible options available are as follows: A. Use the full per unit cost for normal production of 2,640 units. B. Use only differential costs as the cost basis. C. Use differential costs plus a share of fixed costs, based on actual production volume (with East's order) of 3,300 units. Costs Direct materials (variable) Direct labor (variable) Other variable costs Fixed costs Per unit cost Cost plus 15% Total price (600 units) A B C REQUIRED a. If you are the manager of the West Division, what unit cost would you ask the East Division to pay? Show calculations. b. If you are the manager of the East 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 West Division to the East Division? Explain briefly.