Question

QUESTION 4 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. Internal External Totals Sales Sales Sales $300,000 $400,000 $700,000 Var Mfg. $160,000 $160,000 $320,000 Var G&A $40,000 $60,000 $100,000 CM $100,000 $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. The managers of Dubs believe it could sell an additional 500 units at the current price into the external market,

Answer 1

Contribution Margin - External Sales	180,000
Additional Contribution	90,000
Additional Fixed Manufacturing Cost	60,000
Additional Profit	30,000
Existing Operating Profit	140,000
Total Profit	170,000
Contribution Margin - External Sales 1500 units	270,000
Total Fixed Cost
Fixed Mfg	56,000
Fixed G & A	84,000
	140,000
Operating Profit	130,000
Decrease in Operating Profit	-10,000