Question

Tots-To-Go, Inc., has two divisions—the seat division and the stroller division. The seat division supplies the seat frames used by the stroller division to make its strollers. The stroller division produces approximately 10,000 strollers for young children annually. Thus, the stroller division receives 10,000 seat frames annually from the seat division. The market price of these seat frames is $120. The total variable cost of the seat frames is $95 per unit. The market price of the strollers is $300. The unit variable cost of each stroller excluding the cost of the seat frame is $75. The seat division is currently operating at full capacity, producing 20,000 seat frames per year (10,000 of which are transferred to the stroller division). The demand for seat frames is so great that all 20,000 units could be sold to outside customers if the stroller division acquired seat frames from elsewhere. The seat division uses the full market price of $120 as the transfer price charged to the stroller division. The manager of the stroller division asserts that the seat division benefits from the intercompany transfer because of reduced shipping costs. As a result, he wants to negotiate a lower transfer price of $110 per unit. Required: a. Compute the contribution margin earned annually by each division and by the company as a whole using the current transfer price. b. Compute the contribution margin that would be earned annually by each division and by the company as a whole if the discounted transfer price were used. Contribution Margin al Entire company Seat division Stroller division Entire company Seat division Stroller division

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

Answer Parta) Contribution Margin of seat division = (Selling/transfer price - variable cost) * No. of units transferred / sold = (120-95)* 20000 = $ 500000 Contribution margin of Stroller Division = (sale price - variable cost including transferred cost) * no. of units sold = (300-75-120)*10000 = $ 1050000 Total contribution margin of entire company == Contribution margin of seat division + contribution margin of stroller division = 500000+1050000 = $ 1550000 - Part b) Contribution Margin of seat division =((Selling price - variable cost) * No. of units sold) + ((transferr price - variable cost)* transferred units) = ((120-95)*10000)+((110-95)*10000) - = $ 400000

DE 24 Contribution margin of Stroller Division 25 = (sale price - variable cost including transferred cost) * no. of units sold 26 = (300-75-110)*10000 27 = $ 1150000 29 Total contribution margin of entire company 30 = Contribution margin of seat division + contribution margin of stroller division 31 = 400000+1150000 32 = $ 1550000 34 Thus the final answer 36 a Entire Company Seat Division Stroller Division Entire Company Seat Division Stroller Division Contribution Margin 1550000 500000 1050000 1550000 400000 1150000 39 b