Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 23

Cost Allocation And Taxation At Nonprofit Organizations

Nonprofit organizations are exempt from federal income tax except for income from any activities that are unrelated to the nonprofit’s chari­table purpose. An example is the use of a laboratory for both tax-exempt basic medical research and for testing a taxable product for commercial pharmaceutical firms. A concern in these cases is that the tax-exempt nonprofit organization will be able to compete unfairly with for-profit firms because of their tax-exempt status. The key argument is that common costs for the nonprofit's exempt and business activities will be used to “subsidize” the for-profit business (in this case, the taxable product testing).

Required How would cost allocation play a role in affecting the operating results of a non profit organization which has both business and charitable activities?