Ricardo Products, Inc., has a Motor Division that manufactures and sells a number of products, including a standard motor. Data concerning that motor appear below: The Automotive Division of Ricardo Products, Inc needs 10,000 special heavy-duty motors per year. The Motor Division's variable cost to manufacture and ship this special motor would be $35 per unit. Because these special motors require more manufacturing resources than the standard motor, the Motor Division would have to reduce its production and sales of standard motors to outside customers from 87,000 units per year to 69,000 units per year.
What is the total contribution margin on sales to outside customers that the Motor Division would give up if it were to make the special motors for the Automotive Division?

Question

Ricardo Products, Inc., has a Motor Division that manufactures and sells a number of products, including a standard motor. Data concerning that motor appear below:  The Automotive Division of Ricardo Products, Inc needs 10,000 special heavy-duty motors per year. The Motor Division's variable cost to manufacture and ship this special motor would be $35 per unit. Because these special motors require more manufacturing resources than the standard motor, the Motor Division would have to reduce its production and sales of standard motors to outside customers from 87,000 units per year to 69,000 units per year.
What is the total contribution margin on sales to outside customers that the Motor Division would give up if it were to make the special motors for the Automotive Division?

Quizplus · Accepted Answer

To produce the 10,000 special motors, the Motor Division will have to give up sales of 18,000 of the regular motors to outside customers.
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