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1. What method/formula is used to allocate fixed costs to the product and how are fixed
product costs transferred to the income statement as cost of goods sold?
a. Use this equation to calculate the Standard Fixed Costs of actual and budgeted
production volumes for the 9 months ending Sept. 30, 1986. (Check your results
against Exhibit 2.)
b. Demonstrate how the cost of transfers from NASA (bottom, Exhibit 1) are
derived given the volume of transfers from NASA (top, Exhibit 1). What must be
true of the cost of transfers from EROW ?
2. Examine the Actual and Budgeted Fixed Costs of Exhibit 2. Show the calculations used
to derive actual and budget:
b. Cost Adjustments (HINT: the cost adjustment hinges on the answer to question
c. Volume Variance
3. As Choquette, what evidence would you present to the Polysar Board of Directors during
the upcoming performance review of NASA Rubber Division. Pay particular attention to
questions that may be raised concerning the accuracy and meaning of volume variances.
4. In light of the current compensation plan, what sales and production strategy is
Henderson (EROW Division) likely to choose? What would Choquette (NASA Division)
5. Suppose EROW is operating at capacity and would like to purchase additional rubber. If
EROW could buy the rubber from an external source (and not have to purchase it from
NASA) , what is the most that EROW would be willing to pay (per tonne)?
6. Compare the profitability (per tonne) of EROW and NASA. How should the company
schedule production to insure the highest level of profits to the Rubber Group in total?
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