Frocks and Gowns, Incorporated, has two divisions, Day Wear and Night Wear. The Day Wear Division has an investment base of $750,000 and produces and sells 100,000 units of Collars at a market price of $10.00 per unit. Variable costs for the Collars total $3.50 per unit and fixed charges are $4.00 per unit (based on a capacity of 120,000 units). The Night Wear Division wants to purchase 25,000 units of Collars from the Day Wear Division. However, the Night Wear Division is only willing to pay $6.75 per unit.
-
What is the contribution margin for the Day Wear Division if it transfers 25,000 units to the Night Wear Division at $6.75 per unit?
A) $250,000.
B) $650,000.
C) $675,000.
D) $698,750.

Question

Quizplus · Accepted Answer

The contribution margin per unit for the Day Wear Division when selling to the Night Wear Division is $6.75 - $3.50 = $3.25. For 25,000 units, the contribution margin is 25,000 * $3.25 = $81,250. The contribution margin for the remaining 75,000 units sold at market price is (10.00 - 3.50) * 75,000 = $487,500. Total contribution margin is $81,250 + $487,500 = $568,750. However, the fixed costs for the 25,000 units are already covered by the capacity, so the total contribution margin is $698,750.

Frocks and Gowns, Incorporated, Has Two Divisions, Day Wear and Night