The CD Division of Sound Company makes and sells compact disk players (CDP) that can be sold it presently sells to outside customers. Budgeted costs next month for the CD Division are as follows:$\begin{array}{lrr}
\text {Sales of CDPs to outside customers. } & \text { 2,800 units} \
\text { Selling price per CDP to outside customers. } &£ 185\
\text {Unit variable production costs. } &£ 120\
\end{array}$

MaxiSound, another division of Sound Company, would like to buy 1,000 of the CDPs from the CD Division. An outside supplier has offered to sell similar CDPs to MaxiSound for £170 each.
- Assume that CD Division's monthly production capacity is 2,800 units. If CD sells 1,000 CDPs to MaxiSound for £170 each, the monthly effect on the profits of CD Division will be a

Question

The CD Division of Sound Company makes and sells compact disk players (CDP) that can be sold it presently sells to outside customers. Budgeted costs next month for the CD Division are as follows:$\begin{array}{lrr}
  \text {Sales of CDPs to outside customers.  } & \text {  2,800 units} \
 \text { Selling price per CDP to outside customers. } &£ 185\
 \text {Unit  variable production costs.  } &£ 120\
\end{array}$

MaxiSound, another division of Sound Company, would like to buy 1,000 of the CDPs from the CD Division. An outside supplier has offered to sell similar CDPs to MaxiSound for £170 each.
- Assume that CD Division's monthly production capacity is 2,800 units. If CD sells 1,000 CDPs to MaxiSound for £170 each, the monthly effect on the profits of CD Division will be a

Quizplus · Accepted Answer

The CD Division is at full capacity, so selling to MaxiSound would mean losing sales to outside customers. The contribution margin per unit from outside sales is £65 (£185 - £120), while selling to MaxiSound would result in a contribution margin of £50 (£170 - £120). The loss in contribution margin per unit is £15 (£65 - £50). For 1,000 units, this results in a £15,000 decrease in profits (1,000 units x £15).

The CD Division of Sound Company Makes and Sells Compact