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 3,200 units and the MaxiSound Division will acquire the CDPs from the outside supplier if they are not available from the CD Division. If the CD Division sells 1,000 CDPs to MaxiSound for £170 each, the effect on the monthly profits of Sound Company as a whole 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 3,200 units and the MaxiSound Division will acquire the CDPs from the outside supplier if they are not available from the CD Division. If the CD Division sells 1,000 CDPs to MaxiSound for £170 each, the effect on the monthly profits of Sound Company as a whole will be a

Quizplus · Accepted Answer

The CD Division's variable cost per unit is £120. If they sell 1,000 CDPs to MaxiSound for £170 each, the contribution margin per unit is £50 (£170 - £120). For 1,000 units, this results in a £50,000 increase in contribution margin. However, since the CD Division could have sold these units to outside customers at £185 each, with a contribution margin of £65 per unit (£185 - £120), selling to MaxiSound instead of outside customers results in a £15 (£65 - £50) per unit loss in contribution margin. For 1,000 units, this is a £15,000 decrease in total contribution margin. Since the company would have made £65,000 more by selling the 1,000 units to outside customers (£65 contribution margin per unit times 1,000 units), but now makes £50,000 more by selling them to MaxiSound, the net effect is a £15,000 decrease in potential profit. However, if MaxiSound buys from an outside supplier, the company doesn't earn the £50,000 contribution margin. Thus, selling to MaxiSound instead increases the company's profits by £50,000 compared to not selling to them at all, but this is not one of the options provided. The correct interpretation involves understanding the internal transfer's effect on the company's overall profit, considering both divisions as part of the same entity. Given the options and the provided information, there seems to be a misunderstanding in the calculation. The correct calculation for the effect on the company's profit, considering internal sales versus external sales, should focus on the difference in contribution margin and the opportunity cost of not selling externally. Without additional information or clarification, the precise impact calculation based on the provided options appears to involve a misunderstanding in the explanation provided. The correct answer, considering the internal sale and its impact on overall company profit, should account for the opportunity cost and the actual profit increase due to internal sales, which isn't directly represented in the provided options.

The CD Division of Sound Company Makes and Sells Compact