The Stevens Division of Wertheim Industries manufactures component R25, which it transfers to Parker Division at 150% of variable cost. The variable cost of R25 is $ 18 per unit. Jim Laker, head of the Stevens Division, calls Sarah Tanner, his accountant, into his office. Laker says, I am not sure about the fixed- and variable- cost distinctions you are making. I think the variable cost is higher than $ 18 per unit.” Tanner knows that showing a higher variable cost will increase the Stevens Division’s profits and lead to higher bonuses for Laker and other division employees. However, Tanner is uncomfortable about making any changes because she has used the same method to classify costs as either fixed or variable over the last few years. Nevertheless, Tanner recognizes that fixed- and variable- cost distinctions are not always clear- cut.

Required

1. Calculate Stevens Division’s contribution margin from transferring 10,000 units of R25

(a) If the variable cost is $ 18 per unit, and

(b) If the variable cost is $ 22 per unit.

2. Evaluate whether Laker’s suggestion to Tanner regarding variable costs is ethical. Would it be ethical for Tanner to revise the variable cost per unit? What steps should Tanner take to resolve the situation?