Frocks and Gowns Inc. ,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 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?

Question

Quizplus · Accepted Answer

The contribution margin per unit is calculated as follows:

Selling price per unit - variable costs per unit = contribution margin per unit

$10 - $3.50 = $6.50

The Day Wear Division is transferring 25,000 units to the Night Wear Division, so the total contribution margin for 25,000 units is:

$6.50 x 25,000 = $162,500

However, the Night Wear Division is only willing to pay $6.75 per unit, which is less than the variable cost per unit of $3.50, so the Day Wear Division would be better off selling the units at the market price of $10. Therefore, the contribution margin for the Day Wear Division if it transfers 25,000 units to the Night Wear Division at $6.75 per unit is:

$0 (since the transfer is not profitable)