Question

Question 3 The Atlantic Company is a multidivisional company. Its managers have full responsibility for profits and complete autonomy to accept or reject transfers from other divisions. Division A produces a sub-assembly part for which there is a competitive market. Division B currently uses this sub-assembly for a final product that is sold outside at $2,400. Division A charges division B market price for the part, which is $1,370 per unit. Variable costs are $1,060 and $1,230 for divisions A and B, respectively. The manager of division B feels that division A should transfer the part at a lower price than market because, at market, division B is unable to make a profit.

Calculate division B’s contribution margin if transfers are made at the market price, and calculate the company’s total contribution margin. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Division B’s contribution margin $ Company’s total contribution margin $

Assume that division A can sell all its production in the open market. Should division A transfer the goods to division B? YesNo If so, at what price? (If no transfer should be made, please enter 0. Do not leave any fields blank.) Transfer Price $

Compare the contribution margins under three different alternatives. Assume that division A can sell in the open market only 490 of the 980 units it can produce every month, at $1,370 per unit. Assume also that a 20% reduction in price is necessary to sell all 980 units each month. Assume transfers are made and the price is maintained. Alternatives Contribution Margin Maintain price and no transfers $ Cut price and no transfers $ Maintain price and transfers $ Should transfers be made? YesNo If so, how many units should the division transfer and at what price? Units transferred units Price within the range $ to $

Answer 1

(a)		Division A	Division B	Total Co.
	Sales	$1,370	$2,400	$2,400
	Less: Costs
	Variable costs	$1,060	$1,230	$2,290
	Transfer costs	-	$1,370	-
	Contribution margin	$310	-$200	$110
(b)	Transfers should be made at market prices less any avoidable costs.
	In the current situation, no transfers would be made.
(c)	Maintain price, no transfers		$151,900
	(490 × $1,370) − $519,400
	Cut price and no transfers		$35,280
	(980 × $1,096) − $1,038,800
	Maintain price and transfers		$205,800
	(490 x $2,400) + (490 x $1,370) - $1,641,500*
	*(490 × $2,290) + (490 × $1,060)
	Yes
	Units Transferred	490
	Price within the range	$1,060 to	$1,230