Twyla Company is a multidivisional company. Its managers have full responsibilit
ID: 2558026 • Letter: T
Question
Twyla 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 subassembly part for which there is a competitive market. Division B currently uses this subassembly for a final product that is sold outside at $2,450. Division A charges Division B market price for the part, which is $1,510 per unit. Variable costs are $1,150 and $1,200 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.
(a)
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 use either a negative sign preceding the number eg -45 or parentheses eg (45).)
(b)
Assume that Division A can sell all its production in the open market. Should Division A transfer the goods to Division B?
(c)
Assume that Division A can sell in the open market only 530 units at $1,510 per unit out of the 1,060 units that it can produce every month. Assume also that a 10% reduction in price is necessary to sell all 1,060 units each month.
Compute the contribution margins under following three different alternatives to support your decision. (Round answers to the nearest whole dollar, e.g. 5,275.)
Should transfers be made?
If so, how many units should the division transfer and at what price? (If no transfer is necessary input 0 units at $0.)
The division should tansfer
units at $
Division B's contribution margin $ Company’s total contribution margin $Explanation / Answer
Answer a Calculate Division B’s contribution margin if transfers are made at the market price, and calculate the company’s total contribution margin. Division B Division A Total Contribution Margin Sales Price $2,450.00 $1,510.00 Less : Variable cost - Transfer from Division A $1,510.00 - Other Variable cost $1,200.00 $1,150.00 Contribution Margin -$260.00 $360.00 $100.00 Division B Contribution Margin -$260.00 Company's total contribution margin $100.00 Answer b Assume that Division A can sell all its production in the open market. Contribution Margin of Division A Division A Sales Price $1,510.00 Less : Variable cost $1,150.00 Contribution Margin $360.00 Division A contribution margin per unit is same even if it sold all units in the open market. The answer is YES , Division A should transfer goods to Division B. Answer c Total Contribution Margin of Division A - Alternative 1 Maintain price, no transfers Division A Sales (530 units * $1510) $800,300.00 Less : Variable cost [530 units * $1150] $609,500.00 Contribution Margin $190,800.00 Contribution Margin per unit $180.00 Total Contribution Margin of Division A - Alternative 2 Cut price, no transfers Division A Sales [(530 units * $1510) + (530 units * $1359)] $1,520,570.00 Less : Variable cost [1060 units * $1150] $1,219,000.00 Contribution Margin $301,570.00 Contribution Margin per unit $284.50 Total Contribution Margin of Division A - Alternative 3 Maintain price and transfers Division A Sales [(530 units * $1510) + (530 units * $1510)] $1,600,600.00 Less : Variable cost [1060 units * $1150] $1,219,000.00 Contribution Margin $381,600.00 Contribution Margin per unit $360.00 Yes transfer should be made , as total contribution margin of Division A is on higher under Alternative 3 ,Maintain price and transfers The division should transfer 530 units at $1359 to $1510.
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