[cpaswag]

NINJA Question –

My question isn’t A losing $4 b/c they are selling it cheaper? So how is it additional $4 CM?

Division A currently makes a widget. The following is information related to the production of the widgets:

Production capacity 100,000 units per year
Current sales level 80,000 units per year
Selling price to outside customers $20 per unit
Variable costs per unit $12 per unit
Total fixed costs $600,000
Division B wishes to purchase 15,000 widgets from Division A for $16 per unit. Division A has the capacity to handle all of Division B’s needs without changing either fixed or variable costs nor losing any sales to outside customers. Division B currently purchases widgets from the outside for $18 per unit. If Division A accepted the $16 internal price and Division B purchases the widgets from Division A, the company as a whole will be:

Incorrect A.
$30,000 better off each period.

B.
$90,000 better off each period.

C.
$30,000 worse off each period.

D.
$60,000 worse off each period.

Division A will have an additional
Contribution Margin of $4 per widget
sold internally ($4 x 15,000) $60,000

Division B will have an additional
saving in variable cost of $2 per widget
Purchased internally ($2 x 15,000) 30,000
——-
Savings to Company if purchased Division B
purchases the widget from Division A $90,000
=======

[Wilson]

The production capacity is 100,000, while current sales level is at 80,000. There is still 20,000 units that can be sold, so the 15,000 widgets produces additional CM.

[cpa007]

Is the ans $90,000 better off each period.
Division A additional CM because of additional capacity is: 16-12=4
Division B 18-16 saves $2 more
Therefore 4+2*15= $90000
Correct me if i am wrong?

[Anonymous]

yes, the answer if 90,000 better off because they are going to take up this order in addition to their regular orders, not instead….

[cpa007]

@anyatver Thanks!

[Missy]

Don't confuse opporutnity cost with contribution margin.

Opportunity cost would be a factor if the same widgets they OTHERWISE would have gotten $20 each for they sell internally for $16. Opportunity cost is a budgetary/decision making factor.

Contribution margin is simply what's leftover to cover overheads and profit/loss after the cost of goods sold have been deducted from sales. While it can be part of the budget/decision making factors going forward, its no longer hypothetical or being weighed against other options.

So basically something can contribute $4 to the contribution margin that otherwise may have contributed $8 to the CM, but its STILL a contribution not a loss.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Author]

Replies