Question

The Blossom 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 $1,488. Division A charges Division B the market price of $868 per unit of the part. Unit variable costs are $644 and $744 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.

Required:
Calculate division B's contribution margin if transfers are made at the market price, and calculate the company's total contribution margin.

Answer 1

Division B has a negative contribution margin of $-124 per unit when the transfer is made at the market price, indicating a loss for each unit. The total contribution margin for the company is $100 per unit when combining the margins from both divisions.

Step-by-step explanation:

Contribution Margin Calculation for Division B and Total Contribution Margin

To calculate the contribution margin for Division B when transfers are made at the market price, we can follow these steps:

1. 
   
3. Start by identifying the selling price of the final product: $1,488.
4. 
   
6. Subtract the transfer price paid to Division A (market price): $868.
7. 
   
9. Subtract the unit variable costs for Division B: $744.
10. 
    
12. The remainder is the contribution margin for Division B per unit.

Applying this calculation:

Selling Price - Transfer Price - Unit Variable Cost = Contribution Margin

$1,488 - $868 - $744 = $-124 (This indicates a negative contribution margin, implying a loss on each unit for Division B when transferring at the market price.)

To calculate the total contribution margin for the company:

1. 
   
3. Start by calculating the contribution margin for Division A, which is the market price minus its unit variable costs: $868 - $644.
4. 
   
6. Add the contribution margin for Division B, which we've calculated above.

Division A's Contribution Margin: $868 - $644 = $224

Total Contribution Margin: Division A's CM + Division B's CM

$224 + ($-124) = $100 per unit transfer between Division A and Division B.