(Appendix 12A)The DVD Division of Sound Company makes and sells compact DVD players (DVDP)that it presently sells to outside customers.Budgeted costs next month for the DVD Division are as follows: MaxiSound, another division of Sound Company, would like to buy 1, 000 of the DVDPs from the DVD Division.An outside supplier has offered to sell similar DVDPs to MaxiSound for $170 each. Assume that DVD Division's monthly production capacity is 3, 200 units.If the DVD Division sells 1, 000 DVDPs to MaxiSound for $170 each, the effect on the monthly profits of Sound Company as a whole will be a:
A)$9, 000 decrease
B)$74, 000 decrease
C)$20, 000 increase
D)$11, 000 increase

Question

(Appendix 12A)The DVD Division of Sound Company makes and sells compact DVD players (DVDP)that it presently sells to outside customers.Budgeted costs next month for the DVD Division are as follows:  MaxiSound, another division of Sound Company, would like to buy 1, 000 of the DVDPs from the DVD Division.An outside supplier has offered to sell similar DVDPs to MaxiSound for $170 each. Assume that DVD Division's monthly production capacity is 3, 200 units.If the DVD Division sells 1, 000 DVDPs to MaxiSound for $170 each, the effect on the monthly profits of Sound Company as a whole will be a:
A)$9, 000 decrease 
B)$74, 000 decrease 
C)$20, 000 increase 
D)$11, 000 increase

Quizplus · Accepted Answer

Available capacity for outside sales = Capacity - Internal sales
= 3, 200 units - 1, 000 units = 2, 200 units
Lost outside sales = Total outside demand - Available capacity for outside sales
= 2, 800 units - 2, 200 units = 600 units
Total contribution margin on lost sales = CM per unit × Lost outside sales
= ($185 per unit - $120 per unit)× 600 units = $39, 000
 11eaa0c8_9689_5fa1_9cb2_617679c4480e_TB2487_00 The cost would be higher by $11, 000 if the DVDPs are purchased from an outside supplier rather than transferred internally.

(Appendix 12A)The DVD Division of Sound Company Makes and Sells