Question

The Dubs division of Fast Company (the parent company) produces wheels for off-road sport vehicles. One-half of Dub's output is sold to the Hoon division of Fast; the remainder is sold to outside customers. Dub's estimated operating profit for the year is shown in the table. External Internal Sales Totals Sales Sales $300,000 $400,000 $700,000 Var Mfg. $160,000 $160,000 $320,000 Var G&A $60,000 $100,000 $40,000 $100,000 CM $180,000 $280,000 Fixed Mfg. $24,000 $32,000 $56,000 Fixed G&A $36,000 $48,000 $84,000 Op. Profits $40,000 $100,000 $140,000 Unit Sales 1,000 1,000 2,000 Unless otherwise stated assume the fixed costs given above are allocated costs and unavoidable. Hoon division has an opportunity to purchase 1,000 wheels of the same quality from an outside supplier on a continuing basis for $250.00 per wheel. To simplify this example assume the capacity of the Dubs division is 2,000 units and it is producing and selling units as shown in the table. As a result of a marketing campaign, the Hoon division has increased its demand for wheels from Dubs to 1,400 units. The senior management of Fast company requires Dubs to provide the Hoon division with all of these units at the current internal price. By how much would Dubs' total contribution margin change if 1,400 units are supplied to Dubs? Indicate an increase with a positive number and a decrease with a negative number, e.g.-10000.

Answer 1

Supplying 1400 units to Hoons at Current Internal Price: $ 300 Computation of Total Operating Profits Internal Sales External Sales Units sold 1400 600 Sales $ 420,000 $ 240,000 $ Variable Mfg. $ 224,000 $ 96,000 $ Variable G&A $ 56,000 $ 36,000 $ CM $ 140,000 $ 108,000 $ Total 2000 660,000 320,000 92,000 248,000 Total Contribution Margin of Dubs divison less: Original Contribution Margin Decrease in Contribution Margin $ $ $ 248,000 280,000 -32,000

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