Tim Corporation produces sound equipment for home use. The Research and Development (R&D) Division is responsible for continually evaluating and updating critical electronic parts used in the corporation's products. Two years ago, R&D took on the added responsibility of producing all microchip circuit boards for the company's sound equipment. One of Tim's specialties is a sound dissemination board (SDB) that greatly enhances the quality of Tim's speakers.
Demand for the SDB has increased significantly in the past year. As a result, R&D has increased its production and assembly labor force. Three outside customers now want to purchase the SDB. To date, R&D has been producing SDBs for internal use only. The R&D controller wants to create a transfer price for the SDBs that will apply to all intracompany transfers. Estimated demand over the next six months is 235,000 SDB for internal use and 165,000 SDBs for external customers, for a total of 400,000 units. The following data show cost projections for the next six months:
Materials and parts.................................... $2,600,000
Direct labor.............................................. 1,920,000
Supplies.................................................... 100,000
Indirect labor............................................. 580,000
Other variable overhead costs.......................... 200,000
Fixed overhead, SDBs................................ 1,840,000
Other fixed overhead, corporate....................... 560,000
Variable selling expenses, SDBs.................... 1,480,000
Fixed selling expenses, corporate......................520,000
General corporate operating expenses................ 880,000
Corporate administrative expenses...................... 680,000
A profit markup of at least 20 percent must be added to total unit cost for internal transfer purposes. Outside customers are willing to pay $35 for each SDB. All categories of fixed costs are assumed to be unavoidable.
Required
1. Prepare a table that shows the total budgeted costs and the cost per unit for each component of the budget. Also show the profit markup and the cost-plus transfer price.
2. Should R&D use the computed transfer price? Explain the factors that influenced your decision.