The companys policy is to transfer the washing machines from the assembly division to the retail division at full cost plus 10% resulting in internal transfer prices, of $220.17 and $241.69 for S and R when transferred to the retail division. The retail division sells S for $320 per machine and R for $260 per machine to the market

.

(a) Verify above transfer prices for S and R if labour hours are used as a basis for traditional absorption costing.

(b) Calculate new transfer prices for S and R if machine hours are used as a basis.

(c) Compare the profits under (a) and (b) per division and for the entire company. What would you suggest the company to do in terms of their allocation base?

\begin{tabular}{|l|r|r|} \hline & Product S & Product R \\ \hline Production and sales (units) & 3,200 & 5,450 \\ \hline Materials cost (\$) & 117 & 95 \\ \hline Labour cost per unit (\$) at \$12 per hour & 6 & 9 \\ \hline Machine hours (per unit) & 2 & 1 \\ \hline Total no. of production runs & 30 & 12 \\ \hline Total no. of purchase orders & 82 & 64 \\ \hline Total no. of deliveries to retail division & 64 & 80 \\ \hline Market/Retail prices & 320 & 260 \\ \hline Overhead costs: & total: & \\ \hline Machine set-up costs (\$) & 306,435 & \\ \hline Machine maintenance costs (\$) & 415,105 & \\ \hline Ordering costs (\$) & 11,680 & \\ \hline Delivery costs (\$) & 144,400 & \multicolumn{1}{|}{} \\ \hline Total (\$) & 877,620 & \multicolumn{1}{|}{} \\ \hline \end{tabular}