Frocks and Gowns, Inc., has two divisions, Day Wear and Night Wear. The Day Wear

Question

Frocks and Gowns, Inc., has two divisions, Day Wear and Night Wear. The Day Wear Division has an investment base of $850,000 and produces (and sells) 116,000 units of Collars at a market price of $10.70 per unit. Variable costs total $5.00 per unit, and fixed charges are $3.50 per unit (based on a capacity of 136,000 units). The Night Wear Division wants to purchase 24,000 units of Collars from The Day Wear Division. However, the Night Wear Division is only willing to pay $6.65 per unit.

What is the contribution margin for the Day Wear Division without the transfer to the Night Wear Division?

$255,200.

$661,200.

$771,400.

$1,105,200.

Explanation / Answer

CALCULATION OF THE CONTRIBUTION MARGIN Particulars Amount Sales (116,000 Units X $ 10.70) $      12,41,200 Less: Variable Cost (116,000 X $ 5) $         5,80,000 Contribution Margin $         6,61,200 Answer = Option 2 = $ 661,200

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