Division 1 of Hindmarsh’s Engineering Co., expects the following results next year, all from sales to...
Division 1 of Hindmarsh’s Engineering Co., expects the following results next year, all from sales to outsiders:
Sales (10,000 units @$50) $500,000
Variable costs $200,000
Contribution margin $300,000
Fixed costs $100,000
Profit $200,000
Division 1 has a 12,000 unit capacity. Division 2 of the company is introducing a new product. The manager of Division 2 expects to sell 3,000 units of the new product at $75 per unit. The product requires a unit of Division 1’s product, which Division 2 would modify at a variable cost of $50 per unit. Division 2 would not take fewer than 3,000 units. From the point of view of the company as a whole, what will the effect on profits be if the transfer takes place.
Homework Answers
Answer -
Computation of the effect on profits if the transfer takes place
| Particulars | Explanation | ||
| I. | Variable cost per unit of Division 1 product |
Variable costs / Sales unit = $200000 / 10000 units |
$20 |
| II. | Selling price per unit of new product (Division 2 product) | Given in question | $75 |
| III. | Variable cost per unit of new product (Division 2 product) | $20 + $50 | $70 |
| IV. | Incremental contribution margin |
(Selling price per unit - Variable cost per unit) * 3000 units = ($75 - $70) * 3000 units |
$15000 |
Therefore, the effect on profits if the transfer takes place is $15000.
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