40 - 22-35 (Cont'd.) Tanner should indicate to Lasker that...

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Unformatted text preview: 22-35 (Cont'd.) Tanner should indicate to Lasker that the variable costs of R47 are indeed appropriate, given that the methods for computing variable costs and fixed costs have been in place for some time. If Lasker still insists on making the changes and increasing the variable costs of making R47, Tanner should raise the matter with Lasker's superior. If, after taking all these steps, there is continued pressure to increase the variable cost component, Tanner should consider resigning from the company and not engage in unethical behavior. Some students may raise the issue of whether variable cost transfer pricing is appropriate in this context. The problem does not provide enough details for a complete discussion of this issue. Management may well conclude that the transfer price should not be set as a multiple of variable costs. But that is a management decision. The management accountant should not unilaterally use methods of calculating variable costs that are in direct violation of accepted past practice. 22-36 (4050 min.) Goal congruence, income taxes, different market conditions. 1. New Engine Selling price Savings in purchase costs by making engines inhouse Manufacturing costs: Direct materials $100 Direct manufacturing labor 40 Variable manufacturing overhead 25 Total costs of manufacturing Contribution margin from New Engine Net savings in costs by making existing engine inhouse Existing Engine Used by Assembly $375 $400 $125 50 25 165 $210 200 $200 If order for the new engine is $420,000 accepted, San Ramon earns a contribution margin of $210 2,000 units. 240,000 In this case, $180,000 Engine Division will be in a position to supply only 2,000 units to Assembly, and Assembly will have to purchase 1,200 engines from outside. The incremental cost of buying engines from outside is $200 1,200 Net benefit from accepting order An alternative approach is to compare relevant costs of the accept order and reject order alternatives. ...
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40 - 22-35 (Cont'd.) Tanner should indicate to Lasker that...

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